The Real Ponzi Scheme: Private Debt
Steve Keen was recently interviewed by Larry Elliott, Economics editor of the Guardian.
Keen’s argument is that the sovereign debt crisis is merely a symptom of the real cause of the problem: an exponential increase in private debt as a share of national income. In the early stages of a credit cycle, the private sector borrows to fund investment that pays for itself, but in the euphoric bubble phase borrowing is used to speculate on rising asset prices. Debt grows much faster than income but those borrowing the money assume they will be able to pay off what they owe from the rising capital value of their assets. This model of growth, in other words, is no more than a gigantic Ponzi scheme, named after the fraudster who paid out investors with money raised from the next wave of suckers.
Ultimately, of course, private debt and interest charges on that debt needs to be paid off from real-economy income. Asset prices can’t rise forever.
Economists will tell you that gross debt levels don’t matter because one person’s debt is another’s holdings. (Net: zero.) They ignore it.
But if the gross private debt is too large, the real assets in the real economy can’t generate enough income to pay it off. Not really complicated, conceptually.
People gnash their teeth about government debt (which in a sovereign-currency nation never needs to be, never is, paid off), but U.S. private debt hit 300% of GDP just before the crash. Same thing — at a lower but still historically unheard-of level in … wait for it … 1929.