Debt All Over Again

Doing some research for an article about ‘Ten years of crisis’ for a Dutch weekly in July 1983, I interviewed Pieter Korteweg at the Dutch Ministry of Finance. ‘We are in debt all over,’ top cleric Korteweg said. ‘We have put it in a table. Take 1976 as a starting point, from that year on up to July 1983 debt of households rose from 69 to 148 billion guilders (€1 = NLG 2,20371), public debt went from 55 to 145 billion guilders, while companies built up a debt of 155 billion (up from 78 billion in 1976).’ All because of the luxury that’s been possible by lending money from the bank or on the capital market. ‘In the end however there always has to be someone who wants to lend you the money for a certain prize,’ Korteweg went on. The higher the debt figures, the more interest one has to pay. `Korteweg remarks that because of rising debt the Dutch government had to pay 3 billion guilders interest extra each year.

By Frank van Empel

Almost thirty years later a same kind of situation occurs. It’s debt all over again and once again all professionals are negative about the future. There’s a lot of fuss about Greece that can pay interest on its outstanding debt anymore. There have been two bailout packages of 150 billion dollar each to save Greece from bankruptcy. On global scale, however it is a fuss about nothing; the numbers are so big that they have lost their meaning. Check it yourself. Does this mean anything to you: the level of aggregate net government debt in the world rose from $21,900bn in 2007 to an expected $34,400bn in 2011. IMF forecasts indicate the level will reach $48,100bn in 2016. The ratio of world net debt to world GDP rose from 42 percent in 2007 to 57 percent in 2011, and is expected to hit 58 percent in 2016.

In other words, all the governments in the world have built up a net debt of $34.400.000.000.000 up to now, 57% more than in 2007. We don’t even talk about private debt yet. We all are debtors.  I can live with that. It’s easy to find solutions, but then someone or something has to give. Some options:

  1. The EU introduces the Eurobond, to catch billions of euro’s on the capital market in order to finance all deficits in the Union. Speculation against the euro doesn’t make sense. It is simply too big.
  2. The Central Bank buys all bonds of Greece and other heavy debtors such as Italy. By doing that more euro’s come in circulation. In a fast growing economy that can stir inflation.
  3. The European Union has her own budget, but in addition to that may earn taxes as well. By investing in the production of sustainable energy and by lowering taxes the economy is stimulated. With the budget instrument and taxes one can fine tune policies.
  4. To define away the whole problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth — one person’s liability is another person’s asset.

It is no good to dump one of the Euro-sisters. Now it’s Greece. Tomorrow it may be us, the Netherlands. On a global scale 300 billion dollars for a bailout is peanuts. Europe can handle it. The USA has run a deficit on the current account for decennia. The USA could do that because they were privileged. Oil is worldwide paid for in dollars. For that reason there is a lot of demand for dollars. The deficit on the capital account is compensated by a surplus on the capital account (the need for dollars just mentioned.

The dollar, however is being replaced, little by little, by the euro. Then a deficit more or less in Europe doesn’t matter anymore. Deficits will be compensated by surpluses.

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