Archive for March, 2013

Keen Watches Private Debt Publicly!

20 March 2013
India’s experience with Consumerism is little over a decade old. In fact, that experience is largely limited to the *outsourced generation*. Prior to neo-globalisation striking roots, owned roof over the head was an ambition fulfilled in the dying days as only stubbornly salted away savings could rein in the dream. That changed with the advent of consumerist culture, at least for the outsourced generation. Banks fell over each other with attractive packages for home loans, auto loans, holiday loans, credit cards, reverse mortgages, to win the pockets [or rather Deferred Earnings] of those with disposable incomes; and thereby to expand business and to turn bottom lines a healthier black. Financial crisis brought that loan expansion to a screeching halt in highly mature consumerist markets as well as locally. In fact the spectre of “Beg-Borrow-Consume-Borrow-…” had been running amok for over three decades in the developed world to fuel the insatiable growth appetite of Global Capital. Financial crisis and consequent credit crunch brought government finances, and therefore, public debt, under severe close scrutiny as it should have a long ago. But in the all the hallabaloo over public debt, the grotesque private debt escaped attention. The Public Debt as a percentage of GDP [given in bracket] for major consuming economies is as follows: Japan [237%], USA [107%], France [90%], U.K. [89%], and Germany [83%]. While figures for public debt are easily available, those for private debt are very hard to come by. This amply demonstrates that economists’ eyes are not at all on the *Private Debt Ball*. The Economist has given an interactive graph that provides a snapshot of Rise in public and Private debt for some 6 decades up to year 2009 based on Data supplied by McKinsey Global Institute. The snap of the graph is given below, but for interactive features visit the Economist website.
The total debt, that is both public and private debt [Household+Financial+Non-Financial], to GDP ratio in 2009 for countries considered earlier is follows: Japan [471%], USA [296%], France [322%], U.K. [466%], and Germany [286%]. While USA’s public debt ballooned since 2009 due to quantitative easing [or money creation by Federal Reserve], Euro Zone including U.K. chose austerity measures, which would have resulted in winding down of debt, but also contraction in GDP. What it has done to debt to GDP ratios today could not be  a accessed. Even though latest data on private debt is not accessible, the fact remains that it is lot larger than much in the news public debt. Australia’s comedy team, The Chaser, makes fun of this obsession with Public Debt while neglecting Private Debt.
Steve Keen, professor of economics and finance at the University of Western Sydney, belongs to few economists, who are acutely aware of this neglect. This obsession of politicians with public debt and Sovereign defaults, he contends, pushes them to take disastrous decisions like what Euro Zone decided to do in case of Cyprus.
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Of all the insane policies that politicians have crafted during this financial crisis, this decision to confiscate deposits is the worst. If it is proceeded with, then the trust the public must have to use the banking system for payments will evaporate–certainly in the Euro region itself, and especially in the states that are already suffering under the EU’s yoke of austerity. Though there are undoubtedly unique aspects to the Cypriot banking system (in scale only; I doubt that there is any European financial center that does not assist Russian money laundering to some degree), no-one in the public is going to believe the assurances of EU politicians that this will never be repeated in any other country. The result would be widespread withdrawals from EU bank accounts, and hence a fall in bank reserves–which could in turn cause European banks to call in loans since deposits far exceed reserves, and when bank liabilities fall, so must their assets. The damage done by austerity would be amplified overnight by a credit crunch. So for the sake of capitalism, I hope the Cyprian Parliament votes it down, that public protests and demonstrations stop it, that Putin threatening to “turn off the gas” stops it… Basically, anything is better than letting the EU proceed with this madness.
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The case he is making is simple. For the sins of profligacy of public and private spenders, it would be suicidal to punish the savers, who help capital formation. Otherwise, it would kill trust in the Banking System, and worse, in the money. Moreover, no bank in the world, even central banks, can survive a run on it. Because no one has physical cash to pay out all monetised deposits, or even just liquid or demand deposits in the system. An evil avoided at any cost even if the banking system has been allowed to be compromised for long by sheltering dubious money- the way Cypriot Banks cosied up to  Russian Oligarchs, who in turn used them when the going looked good.
Steve Keen’s Debt Watch is a must follow website.
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