When debt levels turn cancerous … Now we know where the tipping point lies. Debt becomes poisonous once it reaches 80pc to 100pc of GDP for governments, 90pc of GDP for companies, and 85pc of GDP for households. From then on, extra debt chokes growth. Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit. "The debt problems facing advanced economies are even worse than we thought." – UK Telegraph
Dominant Social Theme: Some debt is good. Too much is bad. We just need to draw the line.
Free-Market Analysis: Reporter Ambrose Evans-Pritchard has discovered a white paper (see excerpt above) from the Bank for International Settlements that argues debt levels are too high – apparently both privately and publicly. Evans-Pritchard believes easy interest rates are behind current debt problems.
He has played this tune before, as have others. It is a kind of sub-dominant social theme that is dear to the heart of tough-guy financial analysts for mainstream financial shops and sophisticated mainstream newspapers. The idea is that central banks are dumb as stumps and hardly ever get it right.
This a very clever meme as it allows those who do the criticizing to duck the idea of whether central banks should exist at all. Of course they should not, but you will never hear that argument advanced by tough-guy banking hawks. These individuals prefer to heap opprobrium on central banks to making the fundamental argument that central banks ought not to exist. (Sorry, dear Ambrose, we recognize a rhetorical bait-and-switch when we read one.)
In fact, we are ordinarily apt to laud Evans-Pritchard for his tough-guy reporting. He drove Team Billary crazy when he was a Washington, DC correspondent for the Telegraph. He simply wouldn't accept that Vince Foster's death was a suicide, and the top echelon of the administration was thus most satisfied to see his backside when he returned to Ye Oulde Sod.
Evans-Pritchard had set Washington ablaze, as the Redcoats before him, and therefore was due a promotion. He became an international financial editor for the Telegraph; but this posed yet more challenges. It is next to impossible to be a truly hard-nosed financial editor because one can never question the underlying fallacy of central banking.
Why is central banking fallacious? Because central bankers can never know how much money is enough. This is the fundamental reason why even what we call "Brownian" solutions to central banking won't work. One can remove the power of printing money from independent central banks, but one is still left with the problem of how much to print.
Ellen Brown and others who advocate the assumption of money power at the local level by "people power" apparently suggest that locally controlled money printing will be sufficient to the volume required thereof. Ms. Brown used to advocate (as we understood it) that people wanting loans under the local system of money printing would have to secure their loans with property or other securities. But we recall her informing us that was not to be the case, recently.
So no matter what the configuration of a central bank, the fundamental problem (there is actually only one) cannot be addressed. And that is, how much money is too much? In a local configuration, the central bank would provide funds to those who needed capital. But the provision of such capital would be sure to spark a boom in lending, thus creating more and more money. And more money inevitably leads to price inflation.
The problem is not insoluble. The only solution, historically, is a free market in gold and silver. Again, it is the ONLY solution, historically speaking for Western economies. When there is too much gold and silver in the economy (local or regional) the price of money goes down and people begin to hoard and mines shut.
When the glut subsides, the price goes back up and mines reopen because of higher prices and hoarding begins to cease as people sell gold and silver to cash in on better rates. This is the ONLY way that the amount of money in a specific economic region can be moderated. The market itself tells us how much money is too much! No other way.
It is a very simple solution. It is predicated on the free market itself, which makes it anathema to the Wise Leaders who currently attempt to run the world, money-wise. But it is a solution that even the toughest mainstream reporters cannot get behind either.
This is why Evans-Pritchard has to adopt the next-best stance, which is that of a Neo-Keynesian hawk. Hawks of the neo-Keynesian variety are always calling for higher interest rates to "wring out" inflation. Even though they are NOT questioning the fundaments of central banking, they sound properly cynical. It is a rather effective form of play acting.
Does it ease the pain of one's forced allegiance? Probably so. One need only avoid the cognitive dissonance inherent in this stance – an easy enough dodge given that no one will call you on it. (No one in the mainstream media will mention that central banks initiate both inflation and price inflation.)
One can argue about the volume of currency printing (as Evans-Pritchard and others "hawks" tend to do), but that begs the question. Central banks are inflationary engines. They cannot be anything else. Nor can they know how much money to print.
Evans-Pritchard avoids these larger fundamental issues in this article (as he must) by nattering on about the necessity for (some) debt. He comes dangerously close in our view to sounding a bit like US Founding Father Alexander Hamilton who once wrote, "A national debt, if it be not excessive, would be for us a national treasure." Here's some more from the article:
"As modern macroeconomics developed over the last half-century, most people either ignored or finessed the issue of debt. Yet, as the mainstream was building and embracing the New Keynesian orthodoxy, there was a nagging concern that something had been missing. On the fringe were theoretical papers in which debt plays a key role.
"There are intrinsic differences between borrowers and lenders; non-linearities, discontinuities… It is the asymmetry between those who are highly indebted and those who are not that leads to a decline in aggregate demand." Creditors do not step up spending to cover the shortfall when debtors are forced to retrench suddenly. So the economy tanks.
My own suspicion is that debt has very powerful "intertemporal effects" that are not factored into the models. It steals growth from tomorrow, until there is little left to steal. The BIS does not explore this angle. (Mr Cecchetti said politely that I was talking nonsense when I raised this point with him .. well yes, perhaps, wouldn't be the first time).
We can see from the above that Evans-Pritchard, despite his Keynesian attributes is no fan of "excessive." As with so much else in our modern central banking economy, Evans-Pritchard is considerably skeptical, allowing only that "debt … is the lubricant of progress."
He quotes new IMF head Christine Lagarde approvingly, pointing out that she has said there is an optimum "therapeutic dose" of fiscal tightening. What's that? "If too violent, it threatens to tip the global economy back into recession and prove self-defeating." Thus, there is a tipping point, which gives rise to the article's title: "When debt levels turn cancerous." Obviously, there is some level at which debt is not a cancer.
Balance – severe balance – is what Mr. Evans-Pritchard is after. He writes: "The IMF view is that calibrated fiscal tightening must be offset by easy monetary policy, perhaps even QE3 if deflation rears its ugly head again and threatens a full-blown Fisherite debt-deflation spiral. That is broadly my view." Here is how he concludes his article:
Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster. And disaster we have. We must prepare for a long hard slog, for the rest of my life and yours. Do read the report. The BIS has been a rare of voice of good judgement for the last decade.
We do not wish to read the BIS report. We believe none of this. We are simple elves. There is no optimum level of national debt. A national debt is a public debt and a public debt, inevitably, is leveraged by force. Thus the free market is abrogated.
This is the problem we have today. America, especially, holds the world up for ransom via its dollar reserve system, one that is maintained – unfortunately – at the point of a gun. (Or several hundred thousand guns and a nuclear arsenal besides.)
Not for us is Hamilton's notion that public debt is a "treasure." Hamilton liked the idea because he sat close to power. Public money made armaments available and war possible. It lubricated all sorts of public spending and this in turn eased graft. Hamilton died a rich man as a result of his government-associated activities. When he spoke of "treasure," it is perfectly possible he was contemplating his own.
We have come a long way from Hamilton, mostly in the wrong direction; and the practical reality today is a horrible one. Fortunately, there is theory. Theoretically we have advanced when it comes to economic thought in the past 300 years thanks to Austrian finance and the Rothbardian concept of anarcho-capitalism.
Today, we can make the cogent argument that government is useless (admitedly a concept that will prove upsetting to some). But think about it, please. What does government do well? What does it generate, ultimately, but oppression, violence and, over time, inevitable genocides as living standards degrade intolerably.
Logically, every law in fact is a price fix, transferring wealth from someone who has gained it and knows what to do with it to someone who has not earned it. Every law and regulation is an abrogation of Adam Smith's Invisible Hand. Every proclamation issued out by force diminishes the wealth and living standards of the larger community. Logically, it cannot be otherwise. (This is why laws always have unintended consequences and NEVER work out as planned.)
A national debt is NOT a treasure. Neo-classical economics and Misesian human action shows us quite definitively that private solutions to public problems are far preferable to government approaches. There is nothing – not one thing – that government (in our view) can do better than the private sector. Can you name one?
That includes war, of course, a state of affairs that would be most rare within a truly private economy. There is a reason for the saying that "war is the health of the state." We say to our favorite mainstream financial journalist, "No, Ambrose, there is no such thing as moderate debt." In fact, it is like being a little bit pregnant. Provide a moderate public debt and inevitably in decades one will confront an immoderate one.
There is only one way to deal with incipient Leviathan: Starve the beast. Starve it, Ambrose. Show it no quarter. Provide it no mercy. Kill the beast. It is dangerous as fire and must be confronted resolutely. George Washington knew the reality. Hamilton, on purpose or not, was wrong.
