David Kauders FRSA a founder member of Kauders Portfolio Management AG, has been hailed in the financial press as a “radical thinker”. Here, he explains the concepts underlying public concern about jobs and debt.
The coronavirus pandemic has brought an extremely deep recession to the world. The immediate concerns of people are survival: health, jobs, a roof over one’s head and food on the table.
The pandemic has also brought about a behaviour change. People are less concerned to ‘spend, spend, spend’. Those with secure incomes have switched to saving more, but for many, perhaps the majority, fear of redundancy is paramount.
This fear is justified. The behavioural change within British society means that demand for many consumer goods and services will not return to previous levels for years, if ever. People can see and feel this change.
Less obvious is the weight of debt that is burdening some of those facing or fearing unemployment.
It is fashionable to talk about affordability of government debt, noting near-zero interest rates and comparing today’s government debt to gross domestic product (GDP) ratio against much higher government debt levels in 1945. For debt-burdened families, however, this is irrelevant. Britain did not have a household debt problem in 1945. Today, households, like businesses, pay far more than governments for their borrowing. Excepting, perhaps, Citizen’s Advice and charities such as The Money Charity, the debt burden carried by non-government borrowers is ignored by pundits and economic experts.
I put three radical thoughts together into my new book, The Financial System Limit. The first thought is that debt cannot expand to infinity. This can be demonstrated through logic and you can read the reasoning for this in the free preview on my publisher Sparkling Books’ website (see below).
The second radical thought is my estimate of how much of world economic output was being spent on interest before the pandemic arrived. One-fifth. Yes, one-fifth of all work on this planet goes in serving interest costs.
Falling consumer deposit rates and falling government borrowing rates have not been matched by lower business and consumer borrowing costs. It seems that this has been overlooked by all economists. Indeed, academic theories have proved irrelevant to understanding the world’s debt problem. Keynesian expansion worked when debt levels were much lower but no longer works as we approach what I call the “financial system limit”.
The ‘financial system limit’ is a new financial concept I have devised and which is determined by the total cost of borrowing. It can best be defined as the proportion of economic output spent on interest on debt, above which that debt can no longer be repaid in full.
Central banks push credit out furiously to neuter every downturn and have done so continuously since 1945. The result, however, is rising debt costs and an economic cycle that is driven more by their actions than by traditional factors such as expansion and contraction of industries. The central banking cycle adds the third radical thought to the book.
But what is the debt level at which the financial system limit bites? It is impossible to give an exact figure as each country will have its own variables, but financially-stricken nation Puerto Rico, which is paying approximately 38 percent of its GDP in interest, gives a clue.
I suspect that the world was over half way to reaching the limit of debt before the pandemic. Now, more borrowing and less economic output has brought it closer. Remember, it’s the secondary borrowing by businesses and households that matters, since this is on average three times the level of government borrowing.
Of course, there are various proposals around for ameliorating the debt burden. The Chancellor’s “eat out to help out” scheme is a variant of one, known to economists as ‘helicopter money’. The combined effect of those with means saving any windfall, while those without assets or enough income paying off debts or borrowing less, is to contract economies further. The behavioural change brought by the pandemic has neutralised helicopter money. One by one, I demolish all these fantasies within The Financial System Limit.
So what can be done? The answer is that the debt-based financial system invented by Italian bankers early in the Renaissance has reached end of life. Until a new one emerges, we can only stop the problem of excess debt worsening and make some small changes to extend the life of the present system.
The tragedy is that the authorities do not admit to the debt trap that the world faces. The farce, that their policies worsen it.
The Financial System Limit by David Kauders will be published by Sparkling Books as an eBook on 27th July, priced £4.99. It is now available for pre-order on Amazon or Kobo. For more information, or links to additional retails worldwide, visit Sparkling Books.