Does the amount of debt matter to the economy? 

Debt as a percentage of GDP

Right wing politicians and their newspapers like to present a country’s finances a bit like a household budget. In an anti-Labour jibe, Tory prime minister Margaret Thatcher famously put it like this, “Someone has to add up the figures. Every business has to do it. Every housewife has to do it. Every government should do it.”

The implication is that high spending inevitably leads to unmanageable debts and crisis. But lending and debt have always been an indispensable part of the capitalist system. No mills or factories would have been built during the Industrial Revolution without lending on a huge scale—with the money from plundering the colonies.

Today, when a firm wants to expand production it borrows from banks, private equity funds or from shareholders in the expectation of greater profits to come.

When capitalists demand new and costly infrastructure—such as motorways and railway lines—the state is expected to borrow on the markets to pay for them.

Capitalism runs on business cycles. So there are always times when the state’s outgoings are greater than its income and it has to borrow or be unable to perform vital functions.

In times of relatively low economic growth and profitability, truly enormous state debts can accrue. But the state in capitalist society is such a large debtor that it barely matters how much it owes—just so long as the market and the bankers think it is capable of making repayments.

Take Japan, for example. Its public debt is estimated at £7.7 trillion, or 266 percent of its total GDP output. That is the highest debt ratio of any country in the developed world. But because no economist thinks Japan is soon likely to default, almost no one thinks this is a crisis. Those saying managing a country’s finances is like running a household budget, should ask their bank if it would allow an overdraft of almost three times their salary. In recent years interest rates have been so low and money so easily available that both firms and states have racked up very sizeable debts.

The quantitative easing programmes that followed the 2008 financial crash were attempts by governments across the world to fire up demand. Vast sums of money were printed and flowed into the economy in a form of state borrowing. But the scale of those interventions has led to a huge speculative bubble that could burst at any time. Firms that are laden with debt often have an artificially high market value, and the price of assets, such as property, have also spiralled.

Marx talked about this kind of money as “fictitious capital”—fictitious because it no longer bore any resemblance to the state of the “real economy” and production. The resulting credit bubble is now having a devastating effect on capitalism.

In China, the huge boom in property prices is already coming crashing down—with the only question being just how hard the landing will be. This bursting bubble will not only hit bankers and financial speculators. Some ordinary people have invested their retirement savings in new apartments and offices, hoping rising prices will mean that in the future they can afford to stop work. But this year prices for new homes in 70 Chinese cities fell by 1.3 percent.

They have fallen in each of the 12 months since the giant property developer Evergrande admitted it could no longer pay its debts. That price drop is now grinding down China’s economic growth from 8.1 percent last year to just 2.8 percent in 2022.

Now the problem is spreading from China to affect the whole world economy. What the crisis of fictitious capital reveals is that debt plays a contradictory role for the system. It is both vital to its expansion and at the same time part of its downfall.

This is part of  a series of columns about economics