This is the second post in a series that discusses what the “New Normal” might look like once the COVID-19 pandemic is brought under control. In the first post — The New Normal (1) – Community — I suggested that our economies are likely to become more localized and our supply chains shorter. Should that turn out to be the case then the Church has an opportunity to provide leadership, particularly those churches that are organized around the parish principle.
In this post I would like to consider the issue of debt. My grandfather and his family suffered during the 1930s as the economies of the world entered what the British called the Slump and Americans call the Great Depression. It was a time of deflation, which meant that people’s income dropped, often drastically, but their mortgage payments and other debts remained. Consequently, many people in my grandfather’s generation learned to abhor debt. He felt so strongly its dangers that to him being in debt was not just a risk/reward financial decision, it was morally wrong.
How the world has changed since his time. The chart at the head of this post shows U.S. federal debt for the last 30 years. In 1990 it was $4 trillion. By 2019 it was up to $23 trillion. What it will be by the end of the year 2020 given all the stimulus programs that are being proposed is anyone’s guess. But it is bound to be a new record — by a large margin. And it’s not just governments that have run up huge financial obligations. Individuals have bought into the same mind set; credit card debt, student debt, mortgages — the list goes on.
We are now entering a time of deflation, similar to that of the 1930s (see Church Leadership). Goods and services will be available. But, because so many people will be unemployed, there will not be sufficient money to buy those goods and services. Hence factories and service companies will cut back some more, hence more people will lose their jobs, and so on and so on. But the debts that we have taken on, both individually and as a society, will not go away. Hard times for all and bankruptcy for some lie ahead.
An additional problem is that the fractional banking system allows banks to use one asset to secure more than one loan. Each asset provides collateral for multiple loans. At a time when many loans are being called in at one time this policy means that it will not be possible to pay them all.
Even before the current crisis we were seeing problems with the effectiveness of debt. Economic growth has to be based on the growth of resources and the efficiency with which those resources are used. In recent years real growth has slowed or even stopped. Therefore, nations all over the world have responded by increasing debt levels. They are using future debt to pay today’s debt. In other words, they are using the wealth of their children to pay for their current life style. No wonder young people such as Greta Thunberg are so angry. Not only are we not paying our own bills, we are accumulating debts for our children to pay with money that they won’t have.
In a November 2018 Forbes article A Worldwide Debt Default Is A Real Possibility John Maudlin talks about the failure of ‘debt productivity’.
. . . debt is losing its ability to stimulate growth. In 2017, one dollar of non-financial debt generated only 40 cents of GDP in the US. It’s even less elsewhere. This is down from more than four dollars of growth for each dollar of debt 50 years ago.
This has seriously worsened over the last decade. China’s debt productivity dropped 42.9% between 2007 and 2017. That was the worst among major economies, but others lost ground, too. All the developed world is pushing on the same string and hoping for results.
Now, if you are used to using debt to stimulate growth, and debt loses its capacity to do so, what happens next? You guessed it: The brilliant powers-that-be add even more debt. This is classic addiction behavior. You have to keep raising the dose to get the same high.
His conclusion is that there will be what he calls a Great Reset.
. . . we will have to deal, one way or another, with the largest twin bubbles in the history of the world: global debt, especially government debt, and the even larger bubble of government promises. We are talking about debt and unfunded promises to the tune of multiple hundreds of trillions of dollars – vastly larger than global GDP.
The Bible does not tell us that being in debt is always a sin. But it does warn us about the dangers of debt and its part in the sin of worshiping money.
The rich rules over the poor, And the borrower becomes the lender’s slave.
No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other. You cannot serve both God and money.
Maybe my grandfather was more radical than he need have been. But, it does seem to make sense that we should stay out of debt as much as we can in the coming years.