The New Zealand Government, retail banks and the Reserve Bank are today announcing a major financial support package for home owners and businesses affected by the economic impacts of COVID-19.
The package will include a six month principal and interest
payment holiday for mortgage holders and SME customers whose incomes have been
affected by the economic disruption from COVID-19.
The Government and the banks will implement a $6.25 billion
Business Finance Guarantee Scheme for small and medium-sized businesses, to
protect jobs and support the economy through this unprecedented time.
“We are acting quickly to get these schemes in place to
cushion the impact on New Zealanders and businesses from this global pandemic,”
Finance Minister Grant Robertson said.
“These actions between the Government, banks and the Reserve
Bank show how we are all uniting against COVID-19. We will get through this if
we all continue to work together.
“A six-month mortgage holiday for people whose incomes have
been affected by COVID-19 will mean people won’t lose their homes as a result
of the economic disruption caused by this virus,” Grant Robertson said.
The specific details of this initiative are being finalised
and agreed urgently and banks will make these public in the coming days.
The Reserve Bank has agreed to help banks put this in place
with appropriate capital rules. In addition, it has decided to reduce banks
‘core funding ratios’ from 75 percent to 50 percent, further helping banks to
make credit available.
We are announcing this now to give people and businesses the
certainty that we are doing what we can to cushion the blow of COVID-19.
The Business Finance Guarantee Scheme will provide
short-term credit to cushion the financial distress on solvent small and
medium-sized firms affected by the COVID-19 crisis.
This scheme leverages the Crown’s financial strength,
allowing banks to lend to ease the financial stress on solvent firms affected
by the COVID-19 pandemic.
The scheme will include a limit of $500,000 per loan and
will apply to firms with a turnover of between $250,000 and $80 million per
annum. The loans will be for a maximum of three years and expected to be
provided by the banks at competitive, transparent rates.
The Government will carry 80% of the credit risk, with the
other 20% to be carried by the banks.
Reserve Bank Governor Adrian Orr, said: “Banks remain well
capitalised and liquid. They also remain highly connected to New Zealand’s
business sector and almost every household in New Zealand. Their ability to
extend credit to firms to bridge the difficult times created by COVID-19 is
critical and made more possible with today’s announcements. We will monitor
banks’ behaviour over coming months to assess the effectiveness of the
risk-sharing scheme.”
The Government, Reserve Bank and the Treasury continue to
work on further tailor-made support for larger, more complex businesses, Grant
Robertson said.
And so it starts. The latest musings from Australian’s army of economists are beginning to wake up to the grim reality. Reality is not friendly. And the news will likely get worse ahead.
First, Westpac says that the unemployment rate is set to reach 11% by June. The economy is now expected to contract by 3.5% in the June quarter. And a sustained recovery is not expected until Q4.
Just last week they forecast a peak in the unemployment rate of 7%. Since then we got more extensive shutdowns than originally envisaged. Economic disruptions are set to be larger as the government moves to address the enormous health challenge which the nation now faces.
They says that historically, recessions have tended to emanate from investment cycles, particularly those centred on property and building with the initial shock centred on construction. As this recession will hit services much harder, the loss in jobs will be much quicker, but so too can the rebound be much faster, all dependent on how many firms remain solvent.
In usual recessions it is often uncertain whether the economy is in recovery phase whereas the signals around government policy (particularly shutdowns) will be much clearer and households and business will respond.
Their latest forecasts are based on an assessment of the expected impact of the Package on jobs and growth.The two stimulus packages cost a total of $25.8bn in 2019/20 and $36.3bn in 2020/2021.Of that total of $62bn, $22.85bn is allocated to direct payments to the unemployed and social security beneficiaries while $31.9bn is set aside for small business to retain workers.
However small business only receive cash if they retain workers. The subsidy (keeping cash which is withheld from workers for PAYE tax) is only, say, 20–30% of the direct cost of the worker. Given the current hugely challenging outlook for business, the Package will be measured in terms of its success in keeping people in work.
And AMP’s Shane Oliver says:
Auction
clearance rates and sales momentum are showing some signs of slowing
this month. This may reflect an increasing desire on the part of buyers
and sellers to put property transactions on hold to avoid being exposed
to the virus unnecessarily. Social distancing policies will only
intensify this. On its own this may crash transactions but may just
flatten price gains.
However, it’s the likely recession that we
have now entered due to coronavirus related shutdowns that imposes the
big risk. We expect at least two negative quarters of GDP growth in the
March and June quarters with the risk that the September quarter is also
negative. And the contraction could be deep because big chunks of the
economy will be largely shut – tourism, travel, and entertainment with a
severe flow on to parts of retailing. The toilet paper, sanitiser and
canned/frozen food boom may help supermarkets for a while – but as
Deutsche Bank recently calculated for every $1 spent on such items there
is $15 spent on things that are vulnerable to social distancing.
Past large share market falls have seen a
mixed impact on property prices. The 1987 50% share market crash
actually boosted home prices as investors switched from shares to
property. But the key is what happens to unemployment as this often
forces sales and crimps demand. Back in 1987 the economy remained strong
and unemployment fell but the recessions of the early 1980s and early
1990s saw falls in average national capital city home prices of 8.7% and
6.2% respectively as unemployment rose. The GFC share market fall of
55% also saw a 7.6% home price fall, even though it wasn’t a recession,
because unemployment rose from 4% to nearly 6%.
If the recession turns out to be long – pushing unemployment to say 10% or more – then this risks tripping up the underlying vulnerability of the Australian housing market flowing from high household debt levels and high house prices. The surge in prices relative to incomes (and rents) over the last two decades has gone hand in hand with a surge in household debt relative to income that has taken Australia from the low end of OECD countries to the high end.
So he says “we have always concluded that the combination of high prices and debt on their own won’t trigger a major crash in prices unless there are much higher interest rates or a recession. Unfortunately, we are now facing down the barrel of the latter. A sharp rise in unemployment to say 10% or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices. This could then feedback to weaken the broader economy as falling home prices lead to less spending and a further rise in unemployment and more defaults and so on. This scenario could see prices fall 20% or so”.
Bear in mind though that part of this
would just be a reversal of the 9% bounce in average capital city prices
seen since mid-last year.
It’s also not our base case but it highlights why governments and the RBA really have to work hard to avoid letting the virus cause a lot of company failures, surging unemployment and household defaults.
And Goldman Sachs is still relatively sanguine.
Goldman
Sachs said it was now forecasting a 6 per cent contraction in the
domestic economy in 2020 — the biggest since the 1920s Great Depression —
with unemployment peaking at 8.5 per cent.
On the upside, the strength of Australian
bank balance sheets in terms of funding, liquidity and capital left them
“significantly less vulnerable than compared to any point in the recent
past”.
“Similarly, the source of historic loan
losses for banks — corporate balance sheets — enter this downturn in a
better condition than at any point in the last 40 years, with close to
all-time-low levels of gearing and all-time low debt-servicing ratios,”
Goldman said.
But given the scale of the forecast
contraction, bad debts were now expected to rise significantly to 50bps
of loans and slash bank earnings by 20 per cent.
A hard-landing scenario would wipe out between 50-70 per cent of the sector’s earnings.
International Monetary Fund Managing Director Kristalina Georgieva made the following statement today following a conference call of G20 Finance Ministers and Central Bank Governors:
“The human costs of the Coronavirus pandemic are already
immeasurable and all countries need to work together to protect people and
limit the economic damage. This is a moment for solidarity—which was a major
theme of the meeting today of the G20 Finance Ministers and Central Bank
Governors.
“I emphasized three points in particular:
“First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.
“We strongly support the extraordinary fiscal actions many
countries have already taken to boost health systems and protect affected
workers and firms. We welcome the moves of major central banks to ease monetary
policy. These bold efforts are not only in the interest of each country, but of
the global economy as a whole. Even more will be needed, especially on the
fiscal front.
“Second, advanced economies are generally in a better
position to respond to the crisis, but many emerging markets and low-income
countries face significant challenges. They are badly affected by outward
capital flows, and domestic activity will be severely impacted as countries
respond to the epidemic. Investors have already removed US$83 billion from
emerging markets since the beginning of the crisis, the largest capital outflow
ever recorded. We are particularly concerned about low-income countries in debt
distress—an issue on which we are working closely with the World Bank.
“Third, what can we, the IMF, do to support our members?
We are concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact.
We will massively step up emergency finance—nearly 80 countries are requesting our help—and we are working closely with the other international financial institutions to provide a strong coordinated response.
We are replenishing the Catastrophe Containment and Relief Trust to help the poorest countries. We welcome the pledges already made and call on others to join.
We stand ready to deploy all our US$1 trillion lending capacity.
And we are looking at other available options. Several low- and middle-income countries have asked the IMF to make an SDR allocation, as we did during the Global Financial Crisis, and we are exploring this option with our membership.
Major central banks have initiated bilateral swap lines with emerging market countries. As a global liquidity crunch takes hold, we need members to provide additional swap lines. Again, we will be exploring with our Executive Board and membership a possible proposal that would help facilitate a broader network of swap lines, including through an IMF-swap type facility.
“These are extraordinary circumstances. Many countries are
already taking unprecedented measures. We at the IMF, working with all our
member countries, will do the same. Let us stand together through this
emergency to support all people across the world.”
Moody’s says that on 22 March, Australia (Aaa stable) announced economic relief measures, totalling AUD66 billion ($38.2 billion, or around 3% of GDP) in support to households, businesses and guarantees to small and medium-sized enterprises (SMEs), in addition to a package announced previously and a set of measures aimed at supporting credit.
On 17 March, New Zealand (Aaa stable) announced a NZD12.1 billion ($7.3 billion), or 4% of GDP, stimulus package to provide immediate support to the economy and alleviate the disruption caused by the coronavirus outbreak.
Both governments have indicated that they will adopt further measures amid the rapidly deteriorating global economic outlook.
The measures highlight the strong institutional capacity of both Australia and New Zealand to develop emergency fiscal responses during an unprecedented global shock. The measures also demonstrate a high degree of fiscal flexibility that allows for larger near-term budgetary expenditure without threatening longer-term fiscal strength.
In addition to the previously announced AUD17.6 billion support to the economy, the Australian government plans to spend about AUD25 billion in support to businesses in this and the next fiscal year (the fiscal year ends in June), AUD21 billion in support to households and to offer AUD20 billion of guarantees to SMEs. Measures include a boost to SMEs’ cash flow, with upfront payments, temporary relief on creditors’ claims for financially distressed companies, a direct lump-sum payment to individuals and, specifically, to vulnerable households among other measures.
The New Zealand government will spend NZD6 billion by June 2020, as around NZD5.1 billion of the entire package is allocated as wage subsidies for affected businesses in all regions and sectors. The measure aims to stave off a significant deterioration in the labor market. The government has also announced various business tax changes to alleviate businesses’ cash flow pressures and NZD500 million in additional spending on public healthcare, much of which will go on measures that prevent transmission of the coronavirus in the country.
These stimulus packages come in addition to ongoing monetary policy stimulus in both economies. The Reserve Bank of Australia (RBA) has cut its policy rate by 50 basis points so far in March and offered an at least AUD90 billion (0.5% of GDP) special funding facility to commercial banks, which includes an incentive to increase lending to small and medium sized businesses.
The Reserve Bank of New Zealand (RBNZ) delivered an emergency policy rate cut of 75 basis points on 16 March, in addition to announcing a 12- month delay to the increase in bank capital requirements, which it estimates will allow banks additional lending capacity of around NZD47 billion (16% of GDP).
The RBA has also announced a quantitative easing program, aimed at ensuring the yield on three-year government bonds remains around 0.25%, while the RBNZ has left the door open for unconventional monetary policy including largescale asset purchases. {Subsequently Announced].
After accounting for these stimulus packages, Moody’s expects a moderate weakening in both governments’ fiscal positions, with Australia’s surplus turning to a deficit in fiscal 2020. New Zealand plans to fund its stimulus package with increased debt issuance and a drawdown in cash reserves, pushing net debt above the target range of 15%-25% of GDP.
Beyond these measures, weaker revenue growth because of slower economic activity and the triggering of automatic stabilizers will weaken fiscal balances. Moody’s does not view this near-term budgetary expansion by both sovereigns as significantly threatening their fiscal strength. Indeed, it highlights the flexibility and capacity that both governments possess to utilize fiscal policy to support their credit profiles amid an increasingly difficult global economic environment. Particularly for New Zealand, fiscal surpluses and debt levels below Aaa-rated peers provide ample fiscal flexibility
According to the New Daily, Victoria to close schools and NSW is to shut restaurants, and pubs; and cross-border controls will be in place.
Australia is fragmenting as the coronavirus sees state borders closed and premiers embrace sweeping lockdowns.
In
what is confirmation Australians must prepare to face the country’s
most extreme virus safety measures to date, NSW Premier Gladys
Berejiklian has declared non-essential services will shut down within 48
hours.
Victoria also confirmed just
before 3pm Sunday (local time) that schools would shut on Tuesday and
there will be progressive closures of businesses such as pubs and
restaurants.
Schools in NSW will remain
open on Monday, but the premier is likely to make further announcements
on education in the days to come.
ACT
Chief Minister Andrew Barr announced that the territory would follow the
lead of NSW as it was “impossible” to have different arrangements from
the surrounding region.
Victorian
Premier Daniel Andrews made a similar announcement to the NSW premier,
confirming “non-essential” services will be forced to close.
“This is not something that we do lightly,” Mr Andrews said.
“But
it’s clear that if we don’t take this step, more Victorians will
contract coronavirus, our hospitals will be overwhelmed, and more
Victorians will die.”
Supermarkets,
petrol stations, pharmacies, convenience stores, and freight service –
including home delivery of food – will remain open across Victoria and
NSW.
Political
leaders are meeting on Sunday night to consider urgent powers that
would see citizens banned from travelling between suburbs and in between
so-called COVID-19 “red zones”.
“Tonight
I will be informing the National Cabinet that NSW will proceed to a
more comprehensive shutdown of non-essential services,” Ms Berejiklian
said in a statement.
“This will take place over the next 48 hours.”
NSW Health on Sunday confirmed 97 new COVID-19 cases, bringing the state’s tally to 533.
Authorities
have still not been able to work out the source of infection for 46 of
those cases, but they do know those people became infected within
Australia.
Victorian
cases jumped by 67 overnight and the government confirmed there had
been outbreaks in regional areas including Warrnambool and the Surf
Coast.
The call to shut down schools goes against the advice from the federal government.
Prime
Minister Scott Morrison persisted with the message for the past week
that the health advice was that it was best to keep children at school.
The call by Mr Andrews makes Victoria the first state to officially close classroom doors to stop the spread of coronavirus.
Children in other nations have already stopped going to school.
The Victorian government said it was bringing forward the school holidays.
It remains to be seen whether the ban on physical class attendance will extend into term two.
Meanwhile,
South Australia has confirmed it will effectively close its borders in a
bid to stop the spread of COVID-19 following an outbreak within a group
of tourists travelling around the Barossa Valley.
Premier
Steven Marshall announced on Sunday that anyone entering the state
would be subject to a mandatory 14-day isolation period.
The measures will take effect from 4pm on Tuesday.
“The
health of South Australians is unquestionably our No.1 priority and
that is why we are acting swiftly and decisively to protect them from
the impact of this disease,” he said.
“We do not make this decision lightly but we have no choice”.
South
Australia’s borders will be monitored 24 hours a day and anyone
entering the state will be forced to sign a declaration agreeing to
self-isolate.
State authorities moved to declare a “major emergency” on Sunday, triggering the shutdown.
But Police Commissioner Grant Stevens admitted authorities were limited in their ability to enforce the isolation orders.
SA Police have been checking on those who have already been ordered to self-isolate after disembarking international flights.
He
said authorities were “relying on people’s community and sense of
goodwill to do the right thing”, and that overwhelmingly people had been
complying with orders.
Similar restrictions have been put in place in Tasmania and the Northern Territory.
In the NT, there are major fears for indigenous communities.
The Prime Minister And Treasurer released their second stimulus package today which is designed to shield the country from the current emergency, and to keep businesses from collapsing for at least the next 6 months. But a warning, watch how the RBA measures have been rolled into the total support now valued at $189 billion. This is deceptive. They want to make it look like a big number. It is not, yet!
In summary, small businesses can receive cash payments up to $100,000 and some welfare recipients will receive another $750 in payments, as Newstart is repurposed temporarily.
It builds on the measures included in the first $17.6 billion economic stimulus package announced more than a week ago.
ScoMo said “We cannot prevent all the many hardships, many sacrifices that we will face in the months ahead.
He made the point that the health-related issues are leading to a range of broader economic issues, as never before. The total packages are now worth around 9.7% of GDP – or around $189 billion dollars, and Treasury modelling indicates benefits to the national accounts in the June and September quarters to offset the big falls elsewhere. No one knows where results will land. But within that, $90 billion reflects the RBA’s liquidity injections, so the true Government direct support is much lower than advertised.
The UK initiatives, we recently discussed were 15% of UK GDP, so we are still doing things on the cheap in my view. More direct support for households needs to come.
The new measures include:
Temporarily doubling the Jobseeker Payment, previously called Newstart
Allowing people to access $10,000 from their superannuation in 2019-20 and 2020-21
Guaranteeing unsecured small business loans up to $250,000
Reducing deeming rates by a further 0.25 per cent
A second $750 payment will be automatically paid to an estimated 5 million people on July 13 on welfare. The first $750 payment, announced in the first stimulus package, will be paid on March 31.
The
Government will temporarily double the Jobseeker Payment, previously
called Newstart, providing people with an additional $550 a fortnight.
The
payment will be available to sole traders and causal workers, provided
they meet income tests. The Government will waive asset tests and
waiting periods to access the Jobseeker Payment.
The Prime Minister said that “the nature of these payments and the purpose of these payments are changing.” to provide additional income support for vulnerable groups.
For small businesses and Not-for-profits with a turnover under $50 million can receive a tax-free cash payment of up to $100,000, with a minimum payment of $20,000 for eligible companies.
The Government says 690,000 businesses employing 7.8 million people and 30,0000 not-for-profits will be eligible for measures in the stimulus package. The payments will be delivered by the Tax Office as a credit on activity statements from late April.
In an agreement with the banks, the Commonwealth is also offering to guarantee unsecured loans of up to $250,000 for up to three years to businesses, interest free for 6 months.
In response the CBA said “The Commonwealth Bank will support as many of the Government supported loans as possible and in doing so make available up to $10 billion of additional unsecured credit to support small and medium businesses.” The ABA welcomed the move saying ” Banks stand ready to help their business customers get through this, whether it’s deferring their loan payments or providing more working capital. Today’s announcement of a second stimulus package, which includes an SME Guarantee scheme, will mean access to funds to see small businesses through this downturn”.
The Government will allow people to access up to $10,000 from their superannuation this financial year and in 2020-21.
People will not pay tax on they money they access and withdrawals will not affect Centrelink or veterans’ payments.
There will also be a temporary 50-per-cent reduction in superannuation minimum drawdown requirements for account-based pensions in 2019-20 and 2020-21.
On top of the deeming rate changes made at the time of the first package, the Government is reducing the deeming rates by a further 0.25 percentage points to reflect the latest rate reductions by the RBA. As of 1 May 2020, the lower deeming rate will be 0.25 per cent and the upper deeming rate will be 2.25 per cent. The change will benefit around 900,000 income support recipients, including Age Pensioners. This measure is estimated to cost $876 million over the forward estimates period.
The Government is moving quickly to implement this package. To that end, a package of Bills is being introduced into Parliament on 23 March 2020 for urgent consideration.
Subject to passage of the Bills through Parliament, the Government will then move to immediately make, and register, supporting instruments.
The National Cabinet will meet tonight to find a way to force Australians to adhere to social distancing, following the temporary closure of Bondi Beach after people failed to adhere to government spacing requirements.
There were clear signals of more draconian measures should people not keep their distance. The Government also said not to travel unless it was essential. Reality is slowly catching up with the community, but many are still looking the other way.
The UK has taken unprecedented actions to support households and businesses. It will be interesting to see what the Australian Government comes out with when they announce theirs. The UK is providing wages support, rental support, and more support for the small business sector.
Capital Economics said that it expected the unemployment rate to rise from just under 4% to about 6% due to the crisis. However, without this latest government intervention, that rate would have risen to the financial crisis level of 8%.
The UK Government has announced a new Coronavirus Job Retention Scheme. Any employer in the country – small or large, charitable or non-profit – will be eligible for the scheme. But it does not cover those on zero hours contracts, or are self employed.
Government grants will cover 80% of the salary of retained workers up to a total of £2,500 a month – that’s above the median income. Employers can top up salaries further if they choose to.
Employers will be able to contact HMRC for
a grant to cover most of the wages of people who are not working but
are furloughed and kept on payroll, rather than being laid off.
The Treasurer said “that means workers in any part of the UK can retain their job, even if their employer cannot afford to pay them, and be paid at least 80% of their salary”.
The Coronavirus Job Retention Scheme will
cover the cost of wages backdated to March 1st and will be open
initially for at least three months – and I will extend the scheme for
longer if necessary.
There is no limit on the amount of funding available for the scheme.
In addition he announced that the Coronavirus Business Interruption Loan Scheme will now be interest free for twelve months, not 6 months.
And a further cash flow support through the tax system for businesses was announced, buy deferring the next quarter of VAT payments.
That is a direct injection of £30bn of cash to employers, equivalent to 1.5% of GDP.
They will be launching in the coming days a major national advertising campaign to communicate the available support for businesses and people.
To strengthen the safety net, the Universal Credit standard allowance, for the next 12 months, will be lifted by £1,000 a year, as well as increasing the Working Tax Credit basic element by the same amount
Together these measures will benefit over 4 million of our most vulnerable households.
As a result, every self-employed person can now access, in full, Universal Credit at a rate equivalent to Statutory Sick Pay for employees.
Taken this amounts to nearly £7bn of extra support through the welfare system to strengthen the safety net and protect people’s incomes.
UK homeowners can get a three-month mortgage holiday if they need it.
They also announced nearly £1bn of support for renters, by increasing the generosity of housing benefit and Universal Credit, so that the Local Housing Allowance will cover at least 30% of market rents.
They called these actions “an unprecedented economic intervention to support the jobs and incomes of the British people”.
Further measures will be announced next week, to ensure that larger and medium sized companies can also access the credit they need.
He said “we want to look back on this time and remember how, in the face of a generation-defining moment, we undertook a collective national effort – and we stood together”.
In this post we discuss debt in the current context, and consider where the very high levels of debt will take us. And as importantly, who wins and who loses. Transcript is available for download.
Michael Hudson is an American economist, Professor of Economics, Author of Killing the Host and “and forgive them their debts,” among many earlier books.
Many articles and interviews are available on http://michael-hudson.com/
Debt and Power.
Transcript, recorded 20th March 2020
Martin: Today
Debt and Power. I’m Martin North from Digital Finance Analytics. Welcome to our
latest post covering finance and property news with a distinctively Australian
flavour.
Today it is my pleasure
to introduce Michael Hudson, American Economist, Professor of Economics and
author of “Killing the Host” and “and Forgive Them Their Debts”. In the current
environment I think those are great titles. Michael welcome.
You have been following
the economy and the question of debt for quite some time and I’d like to start
the discussion with a simple question: How much debt is too much debt?
Michael: Too
much debt is when it’s beyond the ability to be paid. At a certain point every
debt grows beyond the ability to be paid because of the magic of compound
interest. At 5 percent interest, a debt doubles every 15 years. If you can
imagine since the whole debt take-off in 1945, the first 15 years gets you to
1960. Then, the debt doubles again by 1975, and doubles again by 1990, then again
by 2005, and then today – 64 times the relatively small debt owed back in 1945,
some 75 years ago. And the creation of yet new credit (peoples’ debt to the
banks and to wealthy savers) has grown at a similar rate even without new
lending taking place, so the debt overhead actually has grown much, much more
than that 5% a year. It’s grown more like 15% per year. That is much faster
than national income or GDP. This disparity in expansion paths means that more
and more income and GDP needs to be paid each year, So, to answer your question,
too much debt is when it can’t be paid – that is, can’t be paid without
transferring property to creditors, reducing consumer spending and home
ownership rates, and plunging the economy into austerity in which only the
wealthy financial class is affluent.
What happens when a debt
can’t be paid? Well, either you default and lose your property as creditors
foreclose on your home or drive you into bankruptcy, or – if you’re a
corporation – they drive you under and a corporate raider takes you over. Or
else, you write down the debt.
Interest-bearing debt was
first invented in the third millennium BC, maybe 2800 2700 in the ancient Near
East. The first records are about 2500 BC. Interest rates were about 20%. Rulers
were obliged to think about your question: how to maintain economic balance and
avoid too much debt. The answer they found was that when each new ruler would
take the throne, they would proclaim a Clean Slate. Its terms were basically those
of the Judaic Jubilee Year, whose word
deror was a cognate to Babylonian andurarum.
This Babylonian practice was put in the middle of Mosaic law, in Leviticus 25. It
returned land to debtors who had forfeited them to foreclosing creditors, and it
freed debtors who had fallen into debt bondage. This periodically avoided too
much debt, by regularly wiping out personal debts – mainly agrarian debts
denominated in grains. However, business debts were left in place, to be
settled among the well-to-do who could afford it.
Western civilization
became Western by making a radical break from what went before. Classical Greece
and Rome didn’t have any debt cancellations, because they didn’t have any
palatial authority to do so. They had chieftains, but they didn’t have an independent
palace with authority to overrule the ambitious families that became the
oligarchy. So from the time that the Roman oligarchy overthrew the last king in
509 BC down to the time when Julius Caesar was killed in 44 BC, you had five
centuries of debt revolts. The plebeians in Rome, like many Greeks, demanded
the debts be cancelled.
That demand was what
prompted the call for democracy in Greece and in Rome. They needed political
democracy with everybody able to vote and serve in the government in order to have
a government that could cancel the debts and redistribute the land.
But the oligarchy
resisted this policy, seeking to hold onto its creditor claims that kept the
population at large in dependency and outright bondage. In the 7th and
6th centuries BC, most Greek cities were overthrown by leaders called
tyrants. They were basically reformers who overthrew the closed local aristocracies,
cancelled the debts and redistributed land to the people. Solon abolished debt
bondage in Athens in 594 BC (but did not redistribute land) via his “shedding
of burdens,” his seisachtheia,
referring to the debt burden. A similar radical restructuring occurred in
Sparta.
But Greece ultimately was
conquered, sacked and looted by Roman generals, first in 147 BC then in 88 BC
under Sulla. Rome took over, and its oligarchy was intransigent. They accused popular
leaders wanting to cancel the debts of “seeking kingship,” and usually killed
them. They killed the Gracchi, they ended up killing Caesar, they killed Catiline
when (having failed to become consul) organized an army to fight for debt
cancellation.
Finally, the Emperor’s
Emperor Hadrian and Marcus Aurelius cancelled debts in AD 118 and 178
respectively. By that time these debts were mainly tax arrears. After that,
there were no debt cancellations. That makes Western civilization very different
from the Near East. The legacy of Roman law is that you can’t cancel the debts,
you can’t write them down. That means that again and again and again, debts are
going to grow too big to be paid without forfeiting your land or forfeiting
your liberty and falling into debt peonage, losing your means of support and
going bankrupt.
That’s what we’re facing
today. Is society going to say that all debts have to be paid, without regard
for the economic and social consequences? Almost 90 percent of American debts
are owed to the richest 10 percent of the population. I’m sure the situation is
similar in Australia, and the 10 percent of course includes the London and the
New York banks. So the question is whether you are going to let the economy’s
wealth, income and property be sucked upward as a massive debt foreclosure? Or,
are you going to restore equilibrium by wiping out this enormous overgrowth of
debt.
You really should think
of these debts as bad loans. A bad debt that can’t be paid means that there’s a
bad loan. But modern economic orthodoxy agrees with the Roman oligarchy: All debts
have to be paid, even if that destroys society and ends up in feudalism. We’re
going along that route because that’s our individualist morality – even
anti-social morality at this point. There is a reluctance, a cognitive
dissonance, to recognize that debts are too big to be paid without imposing
austerity that makes economies look like recent Greece or Argentina.
Martin:
It’s a scary thought isn’t it. And is there a difference between public debt
and private debt? In other words, does it behave in the same way?
Michael:
As I think Steve Keen explained on your show before, the public debtors can’t
go bankrupt domestically, because governments can simply print the money to
monetize it, or just refuse to pay the debt. Private debt is created by what Steve
calls endogenous banking. In other words, banks simply create credit (their
customers’ debt) on a computer. A debt IOU is created as the bank’s asset,
along with a credit for the borrower. So the balance sheet remains in balance,
as assets (of the bank) and debts (of borrowers) reman constant. The word
“savings” obscures the fact that creditor loans are simply created out of
nothing but electric current to write a new balance sheet. And then, of course,
interest has to be paid to the creditors.
Private debt is created
for different reasons than public debt. Public banks would not lend for
corporate takeover loans. They would not lend to corporate raiders, or for
stock buybacks. They would not create junk mortgages way beyond the ability of
borrowers to pay. Government debt would be extended presumably for spending for
the public purpose – to increase economic growth and increase prosperity. Private
debt these days has become largely dysfunctional. Its effect has often been to
shift prosperity from 90% of the population to the 10% of the population that
controls the banks and the creditors. So private debt has become corrosive and
parasitic, while public debt is supposed to be handled well – except to the
extent that the oligarchy has taken over the government.
In the United States
since 2008, the Federal Reserve has created $4.5 trillion of credit to the
stock and bond market and mortgage market to support prices for real estate. The
aim has been to make housing more expensive, enabling the banks to collect on
their mortgages and not go under. This credit keeps the debt overhead in place,
thereby keeping the keep the financial system afloat instead of facing the
reality that debt needs to be written down. Because if it is not written down,
the “real” economy will be hollowed out. In that sense the financial overgrowth
is largely fictitious wealth.
The Fed’s supply of $4.5 trillion
isn’t called public debt, because it’s technically a swap, so it doesn’t appear
as an increase in the money supply. The increase in the money supply will be
what President Trump proclaimed today, March 19: $50 billion dollars to the
airlines, and Boeing. Yet Boeing has spent $45 billion in the last ten years on
stock buybacks. So Trump said, in effect, that if companies has spent 92 and 95
percent of all of their income just to buy shares and pay out dividends instead
of investing it, the government will create money and give it to them all over again,
because his priority -is how well the stock market is doing. In other words,
how much does the “real” economy have to shrink in order to keep sucking up an
exponentially growing volume of interest and stock-price gains to cover all
this corporate debt, business debt and personal debt?
Martin:
And so the obvious question then is who are Central Banks working for?
Michael:
Central banks work for their clients the commercial banks. Until 1913 in the
United States the Treasury did almost everything that the Federal Reserve is doing
today. It moved money around the country. It had 12 districts. It intervened in
markets. It did what a central bank did. But then JP Morgan and the bankers
essentially anticipated Margaret Thatcher and Ronald Reagan, and pressed for a
privatized central bank run out of Wall Street, Boston and Philadelphia, not
Washington. They excluded Washington from the Fed’s board so as not to let the Treasury
have a voice on it.
Their logic was that banking
should only be regulated by the private sector, because only in that way could
they turn the government from a democracy into an oligarchy. So that they
created a central bank that acted on behalf of bankers, not the economy as a Treasury
is supposed to do. So basically, the development of central banks for the Western
countries has been a disaster to the extent that they represent financial interests
instead of representing the economy as a whole. Protecting financial interests means
sustaining growth in their product, debt overhead, instead of protecting the
economy from finance and its bad
loans that create a burdensome overhead for families and business.
Martin: Right. I suppose
that explains why they are focused on financial stability rather than the
prosperity of real people.
Michael: “Financial
stability” is a deceptive term. It means increasing austerity for the economy
you cannot have financial stability and economic stability at the same time. If
the growth of debt and finance is exponential and the economy is growing in an S
curve, then the economy has to shrink at a deepening rate in order to maintain
stable compound-interest growth and even higher stock-market prices.
The relevant mathematics was
developed already in Hammurabi’s day by 1800 BC. We have the cuneiform textbooks
from which scribal students in Babylonia were taught. They were asked to
calculate how fast a debt grows at an annual 20 percent (their normal
commercial rate). How long does it take a debt to double at going 20 percent
rate of interest? The answer is five years. How long does it take the quadruple?
Ten years. How long to multiply 8 times? 15 years. How many 16 times? Well,
that’s 20 years. And within a 30-year generation you have a debt multiplying 64
times.
We also have the scribal texts
calculating how fast a herd of cattle grows. It grows in an S-curve. So you
know that the gap between the rise of debt and the growth of a herd is
increasingly wide.
Most of the loans that
were not cancelled were in foreign trade, among merchants (and their debts to
the palace, which advanced many textiles and other inventories to traders). These
commercial debts were denominated in silver, while most domestic debts were denominated
in grain. So unless Sumer could keep on trading abroad and making profits, debts
were going to be too large to be paid. That’s when rulers would raise the
sacred torch, like the Statue of Liberty, signalling a debt cancellation and
they’d cancel the debts. If the crops failed they’d cancel the debts because if
they didn’t cancel the debts then the small farmers would end up becoming bond-servants
to their creditors, who often were tax collectors in the palace bureaucracy. They
then would owe their labor to the creditors, and so couldn’t perform corvée
labor building palaces, walls and other public building or even serve in the
army. So it would have been civic suicide for a community not to cancel such debts.
Mesopotamian and other
Near Eastern rulers were not idealistic utopians. They were simply being practical
in realizing that debts grow faster than ability to be paid. All of their
mathematics shown that. So their models 4000 years ago were more sophisticated
than the models that are used today, which just assume that debts will remain a
stable proportion of income and output.
Martin:
So, I guess we’ve got this pile of debt and it’s growing as the recent central
bank interventions are just adding more debt into the system. How do we get out
of this mess?
Michael:
The only way you can escape and maintain stable economic relations is to write
down the debts. That means you have to let many banks and their loans go under.
That almost happened in 2008. Sheila Bair, the Federal Deposit Insurance
Corporation head, wanted to foreclose on one bank that she wrote was more incompetent
and crooked than the others. That was the largest bank: Citibank. The problem
is that its sponsors were President Obama, Robert Rubin and basically Wall
Street. Rubin was Secretary of the Treasury under Bill Clinton, and had become
head of Citibank. His protege Tim Geithner became the bagman for Citibank, and was
made Secretary of the Treasury. Geithner blocked the Obama administration and Sheila
Bair from taking over Citibank.
Here would have been a
wonderful chance. You take over one of the worst bank in the United States –
the bank that made the bad bets and so many junk mortgage loans that it was called
a serial criminal by former S&L prosecutor Bill Black, now at the
University of Missouri at Kansas City. Imagine if Citibank would have been
taken into the public domain and made a public bank. It wouldn’t have made more
crooked loans. It would have made loans for what people and business actually
needed. But Obama invited the bankers to the White House, and promised to protect
them from the “mob with pitchforks.” The mob with pitchforks were his own voters,
his supporters, the people whom Hillary called deplorables – mainly indebted wage-earners.
Obama said that he would protect the banks from loss and not to worry about
Congressional reprisals.
Posing as a black civil
rights icon, Obama bailed out the banks – his major campaign sponsors and
donors – so generously that not only did they not go under, but they are now
gigantic as a result of the bailouts and designation as Too Big to Fail (TBTF) driving
out the small smaller banks. Obama didn’t write down the mortgages as he had promised
voters. I think he was the worst U.S. president in a century, because the
economy stood at what could have been
a turning point with real hope and change. He’d promised to write down the
mortgage debts to the realistic value of the buildings instead of the inflated
value that Citibank, Bank of America and Wells Fargo and other crooked banks
had put on them. Instead he let them go ahead foreclose on 10 million American
homes.
That became a great
wealth-producing activity as large Wall Street companies like Blackstone came
in and bought up homes that were foreclosed on, for pennies on the dollar, and
turned them into rental properties. That raised rents on Americans very rapidly.
So the rentier sector got rich by
squeezing the working-class, leaving them with little to spend on goods and services
without going deeper into debt. So Obama’s policy basically imposed what is now
more than a decade of austerity on the economy.
Since 2008, the GDP per
95 percent of the American population is actually shrunk. All the growth in America’s
GDP has occurred only to the wealthiest 5% of the population. That’s Obamanomics,
and it’s the Democratic Party policy – which is the main reason why President
Trump was elected. He made a left run around Hillary and the Democratic Party. He’s
doing it again today. That’s why most people expect that despite Trump’s
mishandling of the virus crisis, he will move to the left of Joe Biden or
Hillary or whomever the Democrats decide to run against him.
Martin:
You’ve made an interesting connection between the political forces in the
economy and the financial forces. Essentially, it’s those two against the
people, isn’t it?
Michael:
That’s what you call an oligarchy. It has the trappings of democracy because
you can vote now for either Joe Biden or Donald Trump. They call that a
democracy, but both of them work for Wall street and both of them represent the
oligarchy. So it’s what the 19th century called a sham democracy.
Martin:
Right, and so the appearance of what’s going on and the reality of what’s going
on are actually quite different?
Michael:
I think the appearance is actually what it is. They’re not getting away with
it. The appearance is becoming clear: a corrupt takeover by the oligarchy
deliberately impoverishing the rest of the population. You have the right-wing
Fox News and Rush Limbaugh saying that the outbreak is a godsend to America. Look
at look at how its stabilizing the economy: Number one, it wipes out mainly older
people. They get sick the most rapidly. That means we can cut Social Security
spending the elderly die off. It will help solve the pension shortfall. That’s
looked at as positive. The disease will also end up reducing unemployment, I
think of reporters who said that the world’s overpopulated.
But most of all, the
crisis gave Trump an excuse to give enormous bailouts to Boeing and the airline
companies that already were near insolvency as a result of their own debt problem.
They hope to use the crisis not to revive the economy, but to just pound it into
debt deflation, leaving the debts in place while bailing out the banks and the
landlord class. While people are losing their jobs, especially part-time workers
or those who work in retail stores, bars and restaurants. They are laid off and
can’t pay their rent. Their employers often are small businesses who also can’t
pay their rents. Already there are for rent signs all up and down the big streets
here in New York. The threat is that the landlords will not be able to pay the banks,
because they won’t have tenants. So there’s a rising wave of arrears for all
kinds of debts.
The rate of arrears and
missed payments is one way you tell when debts are too large to be paid. They
are mounting and are up to 30 or 40 percent for student debts. They’re rising for
automobile loans, and many mortgage debts are also in arrears. So basically the
virus crisis has become a vehicle to bail out the both the landlord class and keep
the banks afloat while sacrificing the wage-earning population.
Martin:
So if you run history ahead over the next 3 to 5 years, let’s assume that they actually
find a way to get the health issue under control. What you’re saying is at the
end of it, most ordinary people will be hollowed out further, and power and
authority will be ever more concentrated in the rich elite who own the banking
system and also own the political system
Michael:
That’s the trend. In the 1830s when Malthus’s successor at the East India
Company’s Haileybury college, William Nassau Senior was asked about the million
Irishman who were dying in the potato famine, he said, “It is not enough,” meaning
that it wasn’t enough to balance the economy as it was then set up. His idea of
equilibrium needed many more people to die. Even without having a Social
Security “problem.”
When there’s poverty, suicide
rates go up, and emigration accelerates. You can look at Greece in the last
five years to see what happens when an economy becomes debt strapped. Lifespans
shorten, people get sick, suicides rates rise. Greeks emigrate abroad. But
Americans can’t emigrate, because they don’t speak a foreign language, and
English-speaking countries have gone neoliberal.
It looks pretty bad, and there’s
no economic doctrine that deals clearly enough with what’s happening to explain
that if you have to pay this exponential growth in debt, you’re going to have
less and less to buy goods and services. More and more stores are going to
close and labor will be laid off. Nobody can afford to go to work. That’s what
happens in a depression, and that is the game plan that’s called “financial
stability,” as if it is the price that you have to pay to keep the bad-debt-based
financial sector afloat.
Martin:
Does that mean that unless we can find a completely different formula around
democracy – and I assume that means focusing much more on public infrastructure
public investments and all of those things – there’s no alternative? Who’s
talking about that?
Michael:
A few people you have had on your show seem to be talking about it. But we’re a
small group of maybe 15 people who have a common discussion with each other.
Martin:
So it is still a minority sport. Yet it seems to me to be probably the most
critical debate we should be having, because we have the bulk of the population
effectively being crushed by the way that the system is currently working. Yet
everyone is told to look over there and watch Netflix rather than think about
these more fundamental issues.
Michael:
One of the problems is that since the late 1970s the University of Chicago and
neoliberals have taken over the editorship of almost all the leading academic
journals in this country, England and elsewhere. They’re run by doctrinaire
advocates of privatization and deregulation to broadcast an oligarchic patter
talk. I was teaching at the University of Missouri at Kansas City, the center
of Modern Monetary Theory, but our graduates had difficulty getting hired at
prestigious on universities, because in order to get hired by a prestigious
university you have to publish in one of the journals run by the Chicago Consensus.
The key of free-market
economics is that you can’t impose a free market unless you can exclude everybody
who disagrees with you and shows how a free market will polarize the economy
and lead to austerity. To impose a free market in Chile, for instance, they gave
General Pinochet’s police permission to kill labor leaders, advocates of land reform,
and to close every economics department in Chile except for the Catholic
University that taught the Friedmanite Chicago dogma. So libertarianism is
totalitarian. Libertarianism means a small government, and if government is small,
then who’s going to do the planning? Every economy is planned, and if
governments don’t do the regulating and planning, there’s only one alternative:
Wall Street does the planning, or the City of London, including the planning
for Australia, from what I understand.
Martin:
Right. The consequence there is that freedom – which everybody sort of exposes
as being the character of modern society – is probably less strong than many
people think.
Michael:
The Romans described Liberty as the ability to do whatever you want. They said that
this meant that only the wealthy people could have Liberty to do whatever they
want, including to foreclose and deprive
debtors and other people of their
Liberty.
Martin:
Michael I found this a fascinating and interesting conversation and so critical
for people to understand. I really thank you for your time today. The good news is that there are many more articles interviews on your website michael-hudson.com, whom I understand is curated in Australia by a webmaster here, so that’s an interesting connection.