Debt, per se, is not bad

Tweet

 

There was a story a month ago about a report from the Institute of International Finance that the total amount of global debt had reached a record height of $324 trillion. It’s a huge sum, so large as to be beyond comprehension in terms of our own daily interactions with money. It’s an estimate, of course. It could not be otherwise; human record-keeping is neither precise nor transparent enough to know for certain. Let’s just accept that it’s a very, very large number.

Whether we should be worried about it or not is another question. Since all money owed by one person or body is owed to another person or body, it is inevitably the case that a total financial debt of $324 trillion is precisely matched somewhere by a total financial asset of $324 trillion. It’s just that the debt and the asset are in different hands. And whilst estimates of how much money exists in the world vary significantly, one thing we can say is that, since ‘money’ is, in its very essence, simply a way of denominating and trading debt (“I promise to pay the bearer on demand” etc.), the amount of money in the system must match, if accurately calculated, the amount of debt. An over-simplification, for sure, but if every individual and organisation were to repay all their debts tomorrow, the world would indeed be debt-free – but it would also be money-free. There would still be a pile – many piles – of physical notes and coins somewhere, but they’d be essentially worthless. And the economy would grind to a halt. Asking how much debt is the ‘right’ amount for the world economy is like asking how much money should exist. It’s a question which has no correct answer; the only thing we know is that, as the world’s population grows and becomes more affluent, the amount needed will increase. Worrying about how much debt there is, and by how much it is increasing, is focussing on the wrong question.

The right question is about who is in debt and to whom they are in debt; it’s about the underlying economic power relationships. The reason that it worries some is not the existence of debt, nor the amount of debt, nor the increase in that amount: it is about potential default – whether those in debt will be able to repay their debts. It is a concern by the rich that the poor will not be able to continue transferring their few assets to the rich, because (almost by definition) much borrowing is by those who have no money from those who have lots. What concerns politicians about the debt mountain facing the poorest – whether individuals or countries – should not be whether they are taking on debts that they can’t cover, but how and why the need for them to do so arose in the first place. And since that inevitably leads to discussion about how resources and wealth are distributed in the world, it’s easy to see why they prefer to avoid it.