A popular poem penned by Sydney-born Dorothea Mackellar in the early years of last century speaks lyrically of a vast brown continent shaped by ragged mountain ranges, sweeping plains, jewel seas, golden noonday sun, droughts and flooding rains.
But today any description of Australia must refer to the vast record-breaking expanse of debt held by households, mostly for mortgages. Total loans outstanding are according to the RBA $1.58 trillion for owner occupied mortgages and a further $749.1 billion for investor mortgages.
Australia has the third-highest level of household debt for countries in the Organisation for Economic Co-operation and Development (OECD), worth 211% of net disposable income per household.
And the IMF reported that Australia has the highest level of mortgage stress in the developed world, according to figures from the International Monetary Fund, with 15% of income devoted to paying off loans. But that is an average across all households and small business. In fact, of course many are now putting 40% or more of their disposable income on mortgage repayments, crowding out other spending.
Borrowers have been floored by a series of rate rises by the Reserve Bank of Australia to the current 4.35%. The increased cost of borrowing has left Australia at the top of the league for debt with Canada second followed by Norway and the Netherlands.
I was asked to extract data from my household surveys for news.com.au and they published various articles including “Sydney Stressing Over $1m Home Loan Debt.
This comes as a recent survey from Finder.com.au revealed many homeowners were just months away from having to give up their properties due to financial duress. Close to one in seven mortgage holders told the poll they would be forced to sell or seek hardship from their bank unless rates were cut by February.
As I said in the article, the amount of debt we have compared to incomes makes us massive outliers compared to the rest of the developed world.
Of course the pain is not equally shared, but more detailed analysis shows that in some areas of the country the average owner occupied mortgage is in the millions. So today, I am going to share my more detailed analysis, using our mapping tools.
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Today’s post is brought to you by Ribbon Property Consultants.
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.
Economist John Adams and Analyst Martin North discuss the Queensland economy with Campbell Newman, who was at the helm of the state during an attempt to get debt under control.
What happened, and what does this tell us about community expectations, and their appetite for ever more debt?