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World afloat in sea of debt

Wednesday, 22 March 2017 8:58am

Picture of Can Cinar

Image of Philip Nel 2016_CC storyThe Department of politics at the University of Otago celebrates 50 years of teaching and research this year. This is the third in a monthly series of celebratory reflections on politics during the past 50 years. This month Professor Philip Nel and PhD candidate Can Cinar discuss global debt.

One of the biggest changes of the past 50 years has been the political-economic phenomenon of financialisation. And New Zealand is far from immune to its effects.

Financialisation is the process through which the creation, intermediation and control of credit becomes the core activity in the economy, severing the link between industrial production, life-time employment and rising wages.

From the 1960s onwards, flexible labour markets and the expansion of credit came to sustain consumption in the face of stagnating real wages, and led to the rapid expansion of the financial sector. This was not inevitable.

Government decisions to deregulate the provision of credit, liberalise cross-border financial flows, and to allow exchange rates to float, combined with technological innovations to stimulate investment and employment in the financial sector.

New centres of power were created - the wolves of Wall Street and credit-rating agencies are but two of the most obvious.

Finance spreads its tentacles wide. In corporate affairs, the instrument of shareholder value supplanted the interest of all other stakeholders. In addition, our everyday life increasingly became disciplined by the rationality of finance, namely risk-taking and debt repayment.

From student loans to credit cards to mortgages to insurance schemes to superannuation - there is nowhere to hide from financialisation.

Capitalism no longer has to control the working classes through political oppression. Indebtedness generates a far more effective tool to tie the wellbeing of the individual to the survival of the system.

The regular financial crises that financialisation helps to create, themselves contribute to instil the everyday discipline of finance, and dupe governments into paying for the profligacies of the financial sector.

One of the main effects of financialisation is that the world has become afloat on a sea of debt. Credit (both public and private) expanded from a total of approximately US$850billion in 1967 to US$230trillion in early 2017, which is three times as large as total world gross domestic product.

Of that total debt, two-thirds is owed by public institutions (governments and state-owned enterprises).

High public indebtedness is not necessarily a problem, especially when it is the result of government investment in physical and human capital. However, it is often presented as a threat to financial stability by those who gain from the neoliberal belief that small government and fiscal austerity is best.

Ironically, it is the practices of financialisation itself, and not the level of public debt, that creates the conditions for global crises, such as the Great Recession of 2007-09.

The explosion of public and private debt remains fundamentally risky, though. The massive expansion of credit and leverage creates its own momentum, and the mass commodification of debt polarises the global economy into debtors and creditors.

This is the primary source of huge global inequality both within and between states. Those who control the provision and perpetuation of credit gain significantly more than those who find that credit is the only option to sustain consumption in view of declining real wages.

The financialisation of capital detached investment from production and transformed it into speculation. Precariousness, unemployment, housing shortages, and inner-city poverty all trace their roots back to this.

How should we respond to financialisation and exploding debt? There is surely room for the personal caution that our (great-) grandfathers and grandmothers learned in the 1930s: do not over-extend yourself or your household, no matter how attractive the new financial package that the provider offers.

Government austerity is not equally advisable, though, despite what some global rule-makers believe. In fact, the more sensible observers suggest that if private sector spending is falling and unemployment is rising, the Government has to increase its spending.

Although in the short run austerity policies may lift the value of financial assets in a country, these policies hurt most of the people. Prescribing retrenchment to fight debt results in rising unemployment, cuts in social provision, and deflation.

As is evident from the recent crisis in the euro zone, austerity does not decrease debt levels and undermines the very prerequisites for rebuilding an economy.

One important way to resist total financialisation, it would seem, is to stop assuming that the same considerations that oblige us to repay personal debts apply to reducing public debt. Debt rules, yes, but it is time that people re-establish their sovereign rule over public debt.


Reproduced with permission from the Otago Daily Times. Read the original article here.

View Professor Philip Nel's staff profile

View Can Cinar's postgraduate student profile