>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.
hey, as I've said before, a capitalist soft landing -- which still might
occur -- can be a recession for workers.
>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.
I do it all the time, boring pen-l to death (the "Three Bears" and all
that). One thing is that the private sector can go bankrupt much more
easily than the government.
>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.
I don't know about the causation suggested here. I think that in the US,
the rising and then high profit rate helped create the euphoria and the
stock market bubble and the economic boom more than the shrinking
government deficit (rising surplus). The shrinking deficit (rising surplus)
in the US wasn't simply a matter of the economic boom but also tax hikes
and changes in budgeting rules that encouraged cuts in social spending.
Also, the boom on the demand-side may have been allowed by faster
supply-side growth (the "New Economy") in the late 1990s.
>Totally unnoticed, the containment of public debt coincided with an
>explosion of private debt, i.e. borrowing by individuals and businesses.
right. There are two trends here. (1) optimism-bred borrowing by the rich,
encouraged by the stock market bubble; and (2) necessitous borrowing by the
working class, encouraged by the stagnation of real wages.
>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.
US personal bankruptcies slowed and even fell in early 2000 (last time I
checked), partly because real wages started to rise steeply. Of course,
this mini-trend will likely be reversed in 2001, as real wages fall
relative to labor productivity and unemployment rises.
>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.
that's one theory. Thomas Palley's business cycle model -- based on
Minsky's -- centers on this. I'm not sure all recessions happen this way.
>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.
the currency referred to is a kind of government debt.
>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.
I hope he's not proposing the re-establishment of bank reserves, since that
would deflate the economy.
>A sound monetary system is the first prerequisite for a sound economy.
sure. This guy should read Irving Fisher on the "debt deflation theory of
great depressions."
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
