Perhaps some Pen-L might comment on this..
Cheers, Ken Hanly
April 6, 2001
CBC Radio One Commentary
by David Gracey
These days the media is full of bad news stories about the economy. We
hear
of massive layoffs in the auto sector. Consumer confidence is
plummeting.
The same economists who only a few months ago were talking about a soft
landing are now using the 'R' word.
Economic discourse is, however, limited to certain safe topics. Such
factors
as rising energy prices, declining stock markets and falling consumer
demand
are readily identified. These are important issues, but they are
essentially
symptoms of an underlying malaise. The real problem is the massive
private
debt -- something that is never discussed.
Several years ago there was a lot of discussion in the media about the
public debt. When the national debt reached $583 billion, there were
cries
of alarm from our corporate and political leaders which resulted in
massive
cuts to social spending. Due primarily to our expanding economy since
1993,
government deficits were brought under control and surpluses became the
order of the day. There was general euphoria, the stock markets took
off,
and the economy boomed.
Totally unnoticed, the containment of public debt coincided with an
explosion of private debt, i.e. borrowing by individuals and businesses.
Consumer debt doubled in the past six years. The spending boom in the
U.S.
and Canada was largely fuelled by borrowing. In both countries household
debt exceeds disposable income by a wide margin. This has resulted in an
escalating rate of personal bankruptcies. Numerous articles have
deplored
this apparent reckless borrowing by consumers, but have failed to
recognize
our overall dependence on borrowing.
More borrowing means higher interest payments. In the U.S. consumers are
now
spending 14% of their incomes on interest payments, a level that was
last
reached just before the 1990-92 recession. Individuals and businesses
simply
cannot continue to expand their debt indefinitely. Lower interest rates
do
help, but ultimately borrowing has to drop. When it does, a recession
looms.
For the simple truth is that our economy, as presently structured, runs
on
debt and can run no other way. For our economy to grow, additional money
is
needed -- about $25-30 billion every year in Canada. About 6% of this
amount
is legal tender and is provided debt free by the federal government
through
the Bank of Canada. The remainder is credit, created when we borrow.
When they make loans, financial institutions monetize debt, that is they
convert our collateral into credit, which then circulates as money. Thus
the
debt grows, and when the credit bubble gets unsustainable, it bursts.
In the aftermath loans are defaulted, bankruptcies spread, layoffs
increase,
demand drops and we are in a recession.
So the real problem is debt. Our monetary system requires that we
increase
debt in order to have economic growth, but rising debt in turn ensures
that
a recession will ensue. Deregulation of the financial sector, notably
the
abolition of bank reserves, have made the debt problem much worse. We
need
more debt-free money in circulation.
A sound monetary system is the first prerequisite for a sound economy.
David Gracey is a member of COMER. He is a retired principal, and taught
economics. He actively promotes economic literacy.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Copyright © 2001 David Gracey. All rights reserved.
"Economic Reform" is the monthly journal of the Committee on Monetary
and
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