Global capitalism has become increasingly dependent on debt in recent decades. For 14 rich economies, total debt rose as a share of national income from 120 percent in 1960 to more than 260 percent in 2017. This total includes borrowing by states, private companies, and households.
The financial markets focus on government debt in relation to national income. Because economies are going to shrink dramatically this year, while government spending increases, this ratio will rise sharply.
If it gets too high, governments may not be able to keep up their interest payments on this debt—or may even default.
A leaked Treasury document warns that Britain may face a “sovereign debt” crisis. It expects the budget deficit—what the government has to borrow to cover its spending—will be £337 billion in 2020-21. And, in a worst case scenario, it could be £516 billion.
Before the pandemic, the deficit was forecast at £55 billion. Predictably the Treasury’s remedy is another bout of austerity—cuts, tax rises, and a public sector pay freeze.
Economists influenced by John Maynard Keynes, who argued that capitalism needs state intervention to work, say it is a mistake to worry too much about government debt. If the economies recover quickly from the lockdowns, then the debt ratio will improve, and government tax revenues will rise.
Andrew Bailey, the new governor of the Bank of England, admits that the bank is engaging in “monetary financing”. In other words, it is effectively printing money to cover the extra government spending.
But one school of post-Keynesian economists argue that there’s no problem about this so long as the spending finances productive investment that allows the economy to grow. They are supporters of what’s called Modern Monetary Theory.
This kind of reasoning assumes that the productive economy was in a relatively healthy state before the pandemic hit.
But this isn’t so. We can see this if we look, not at government, but at private debt.
The latest Monetary Stability Report of the Federal Reserve Board—the US central bank—shows households and banks were in a relatively healthy financial state before the pandemic.
But corporate debt was a very different picture. “The leverage of businesses—the ratio of debt to assets for all publicly traded non-financial firms—was at its highest level in 20 years at the beginning of 2020,” it says.
“Moreover, for highly leveraged public firms—defined as firms above the 75th percentile of the leverage distribution—this indicator is close to a record high.” As the Financial Times put it, “Companies are dangerously drunk on debt.”
Firms struggling with low profitability after the 2008 crash loaded up with debt, which was cheap because the central banks kept interest rates low.
But “in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.”
Add to this the fact that the pandemic will push many working class people further into debt.
The London Business School reported that household spending in Britain fell by 41.2 percent in April. But this figure masks very different situations.
As the Financial Times said, “While those with higher incomes saw their savings rates rise, those with the lowest incomes, including people newly impoverished by the crisis, were pushed into debt with sharply falling savings and a spike in bank charges as people went overdrawn on their accounts.”
In other words, during the lockdown the better off have cut spending on restaurants, holidays, and other treats and saved more from largely intact incomes. The poor have struggled with vanishing incomes and gone deeper into debt.
The resulting financial pressures will be used by governments and employers to bully workers back to unsafe jobs. Meanwhile, firms are getting more cheap credit, so the corporate debt crisis will continue to escalate.