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The Monster behind Debt and Deficit: The Great Vampire Squid.

Utterly dismayed by the Coalition Government’s attempt to put into law the obligation to reduce the structural deficit by 2017-18, I thought I would repost the BBC’s excellent explanation of the difference between all the types of debt in the UK that the politicians talk about.

http://www.bbc.co.uk/news/business-25944653

Basically, “the debt” is the running total of how much the UK owes, and “the deficit” is the gap between the money the Government receives versus what it pays out. The majority of this debt is a “cyclical deficit” (i.e. when there is an economic downturn this rises significantly, as it has done since the onset of the financial crisis in 2007, because tax receipts fall as people lose their jobs and businesses fail to make profit) but some of it is a “structural deficit” (Governments not only pay for spending for consumption, i.e. benefits, pensions, tax cuts, etc. they also spend money on capital projects, i.e. infrastructure, which is believed to boost the economy).

I’d like to draw your attention to the BBC article where it states that:

If the government is running a deficit, it may make investments on top of this, and will therefore need to borrow to cover both.

For example, in the calendar year 2007, the Labour government borrowed £37.7bn, of which £28.3bn was invested in big projects (the balance of £9.4bn represents the current budget deficit). Conversely, in 2013, the Conservative-led coalition borrowed £91.5bn, with just £2.7bn invested.

Now, the Coalition are in a tougher situation (in my opinion because they are heading towards year 5 of a self-defeating austerity programme – see Mark Blyth on why that is ) because the economy is still tanking, but we can see that even in 2007 Labour were investing just under 5 billion more than the Coalition.

Investment in the future is HUGELY important, which the Common Weal correctly outline here (http://www.allofusfirst.org/the-key-ideas/why-we-must-invest/). We can’t let the word debt, or deficit trick us into failing to see behind those boogey-man words to what is really going on, which is a massive redistribution of wealth from the public (collective goods we hold in common such as the NHS, and personal wealth) to private hands. Danny Dorling has a good piece about why this is bad, and of course the Spirit Level too in the UK context, and of course Oxfam’s shocking report that 85 billionaires own more wealth than the poorest half of the planet, that’s 3.5 billion people.

Now, debt and inequality have a very cosy and close relationship, always have, always will, and this is why it is important to tackle debt, but not for the reasons the mainstream politicians give. I’m just posting below a short piece from my thesis which outlines the real problem with debt, and hopefully you can see that our solution is to focus on the creditors, which is what I will think about for the next blog.

Extract from thesis:

In Ann Pettifor’s prescient book ‘The Coming First World Debt Crisis’ (2006), she foresaw that the building up of gigantic levels of debt in the world economy was ‘burying millions of citizens, dozens of companies and a number of nations in debt’ (p. 5) which would eventually cause a massive financial crisis. She challenges the idea that finance is ‘natural’ – ‘it is important for our democracies…to understand that the system has been constructed by political process’ (p. 28); or ‘neutral’ – ‘Western society has provided the finance sector with an implicit, if not explicit mandate to exploit humanity and the earth, to extract maximum assets from both humanity and the earth, both now and in the future’ (p. 120). She calls for citizens to realise that the system is a human construct and can therefore be remade, with a different moral compass guiding it.

Focusing on the role of finance in international economic and political crises, Pettifor shows the parallels between previous crises and today, where the idea of the common good has been separated from the aims and objectives of finance and industry and ‘individuals and corporations have been freed up (by governments, politicians and officials) to pursue their own interests, regardless of the broader interests of their community or country, or indeed of the global economy’ (p. 28). In a debt-based system creditors are privileged and the mechanisms of politics, the economy and society are set up to ensure that policies are designed to protect the assets, loans and debt repayments of creditors. Pettifor argues we see this in the discourses surrounding inflation and deflation where the former, which harms the holders of assets, is avoided at all costs, while the latter, which benefits the holders of assets but harms those without, is rarely even discussed. The majority of policies, as we can see in the Bank of England’s remit, are designed to fight the dangers of inflation, whilst ignoring or marginalising deflation[1].


Debt: a Great Vampire Squid

Lazzarato (2012) is even more explicit in the importance of being clear about the nature of the current economic system. He argues that it is a political act to call this system ‘finance’ and it would be more accurate and transparent to speak of a ‘debt economy’ as ‘what we reductively call “finance” is indicative of the increasing force of the creditor/debtor relationship’ (p. 23). This relationship is not a neutral one, and the creation of the ‘indebted man’ ensures that ‘through the simple mechanism of interest, colossal sums are transferred from the population, business and the Welfare State to creditors’ (p. 20). Lazzarato’s stance, that debt is a tool for exploitation is not a novel one, Marx having outlined the importance of the credit system as the mechanism by which money becomes centralized in fewer and fewer hands:

 

In its first stages, this (credit) system furtively creeps in as the humble assistant of accumulation, driving into the hands of individual or associated capitalists by invisible threads the money resources, which lie scattered in larger or smaller amounts over the surface of society; but it soon becomes a new and terrible weapon in the battle of competition and is finally transformed into an enormous social mechanism for the concentration of capital. (1990, p. 777–8)

 

Pettifor agues that in the current globalized economic system, debt functions in four principle ways (p. 56):

  1. It extracts assets from the productive sector in a manner that can fairly be described as parasitic;
  2. Transfers assets from those without, to those with assets;
  3. Makes a claim on the future;
  4. Builds up exponentially rising levels of debt, which are unlikely to be repaid in full.

Under this analysis, debt is the mechanism by which the economy currently works, and so individual and household consumers can be seen as ‘heroic debtor-spenders’ who playing a vital role in propping up the world economy. In support of this theory, Pettifor refers to data showing that in 2006, UK personal and household debt stood at a total of £1,114 billion – almost equivalent to UK Gross Domestic Product (GDP) (p. 97). As of November 2013, this has risen to a massive £1,439 trillion – in more understandable terms, this means a doubling of average household debt (including mortgages) in only 8 years from £25,195 in April 2006 to £54,472 in April 2014 (The Money Charity, 2006).

Such spending from households is an example of debt-as-parasite, sucking the lifeblood of the economy like a ‘great vampire squid’[2]. Money, which we swap for debt plus interest, is barren, it has no natural powers of multiplication. Therefore any interest on money must come from another source – from labour or the environment. The debt then ‘becomes ultimately unpayable because the rate of interest, or the rate of return on the privately created credit, exceeds the rate at which society (broadly Industry and Labour) and the ecosystem can be renewed, can generate additional resources, and can repay’ (p. 57). Because debt-based money is the majority (97%) of money created in the UK, this means that money, which could be used for productive purposes or social goods, is endlessly recycled into higher profits for creditors.

[1] Thus we have a way to understand the change to measure inflation on the Consumer Price Index (CPI), which excludes housing costs, from the Retail Price Index (RPI), which includes housing costs. If under CPI, inflation is at 1.7%, but in RPI it is 2.7%, and the CPI is the official measure, then in theory wages for labour will rise in line with the lower of the two figures. If however costs are rising in line with the RPI, then there is a 1% gap between the cost of living (including housing which is becoming an increasingly bigger portion of our spending) and wages. This benefits those who already hold housing as assets, as the price is inflating, but damages workers as their wages are decreasing in real terms, taking into account the increasing cost of housing.

[2] Originally coined by Matt Taibbi who in Rolling Stone referred to Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Now the phrase is sometimes used to denigrate financial markets more broadly. (9 July 2009) Available at: http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405

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