The Impossible Puzzle: How to Reduce Debt Without Growth
Greece may be only the first carriage of the Sovereign Debt Express to go off the tracks, according to The Independent, 6th Feb 2012
The UK’s current net debt, ignoring measures to support the financial sector, is around £1,000bn (around 63 per cent of GDP). Interest costs are around £49bn, equivalent to 5 per cent per annum (around 3 per cent of GDP and 10 per cent of tax revenue). Assuming government revenues equal expenditures, Britain must grow at 3 per cent per annum just to ensure its debt levels do not rise.
In the UK, significant cuts in government spending and higher taxes to bring the budget into balance have contributed to slower growth, in turn increasing the budget deficit driving higher government borrowing requirements and overall debt levels.
Economies with debt are forced to run a budget surplus (through spending cuts and tax increases), grow at very high rates, decrease borrowing costs or combination of these to merely stabilise debt levels.
Where growth slows, indebted governments can become trapped in a self-defeating cycle of ever greater cycle of austerity which compound rather than solve the problem of debt or public finances.
As Europe illustrates, budget deficits, low growth rates and increased borrowing costs can rapidly trigger a debt crisis, as investor become concerned about a nation’s creditworthiness.
The ultimate challenge is to restore growth. Without growth, the problem of debt is difficult to resolve. But without debt, growth is difficult to generate. This is the impossible puzzle that governments everywhere, including the UK, are trying to solve.
In a world of low growth, Greece and the other debt burdened European countries may only be the first carriages of the Sovereign Debt Express that go off the tracks.
Yes, this “impossible puzzle” really is impossible to solve under the current set of rules:
- When a bank makes a loan, the money supply increases
- When somebody repays a loan, it reduces the money supply
Almost all of the money in circulation represents debt. For nearly every pound in circulation, someone else has to be in debt by an equal amount. To have less debt in the economy means less money and hence a recession. If we don’t want a recession, we need more money in circulation, but more money means more debt! It’s a vicious circle.
However once we consider the possibility that money doesn’t always have to represent debt, that perhaps there could be another way of money creation possible other than “as debt”, then there’s light at the end of the tunnel…
A few simple changes to the banking system could end this awkward way of money creation. Money doesn’t have to be created as debt: it can be created debt-free as well.
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