It won’t be the first time I have been castigated for maintaining that fuller context can change perspectives around economic issues. I was once ridiculed by a newspaper cartoonist who drew me as a helper in the corner of a boxer called Rand against his opponent called Dollar. I was telling my guy not to worry because it was not that he was so weak, but that his opponent was so strong.
The satire was clearly based on not seeing any difference between the two statements. But I would argue that they are more than simply seeing the glass half full or half empty. It’s about seeing the glass itself and what goes into it.
South Africans generally seem to suffer from a chronic context deficit disorder.
We are an integral part of the global economy and world finance, but are so obsessed with our own issues that we could easily be caught flat-footed again, as we were in the 2008 meltdown. There are things we can do and indeed are doing that are beyond the scope of this article, but certainly exclude allowing our parochial obsession to drive us to despair and hopelessness.
South Africa’s debt position is such an issue where informed debate seldom draws in the far more serious global situation that threatens to overwhelm us.
This is not to argue that our 60% or projected 70% government debt to GDP and private debt levels are not a cause for serious concern, especially because of global distrust, our redemption capacity, and debt servicing impact on government spending. It is simply saying that we may be obsessed with the wrong things against the global background.
Total global debt is set to exceed a record $250 trillion by the end of this year, according to a Reuters report based on Institute of International Finance (IIF) research. That’s about three times gross world product (GWP) or $32 500 per person. And it shows no sign of slowing.
While the increase has been largely driven by an increase in government debt (now at about 100% of GWP), private and financial sector debt is still the largest and most threatening part of global debt.
In practice, governments don’t go bankrupt: they have the capacity to simply print more money, but as we saw with Lehman Brothers, a single collapse of a major financial institution can trigger a global meltdown. Unorthodox economist Steve Keen has consistently highlighted private debt as the real Achilles’ heel.
Debt outpacing the global economy
American Federal Reserve board chair Jerome Powell, who can only be described as the greatest ditherer the board has had, has finally admitted that “debt is growing faster than the economy and that is unsustainable”. It confirms too that consistently increasing debt levels and forcing interest rates down to ridiculously low, even negative levels ultimately does little to promote economic growth. It has removed the one option the world has relied on to pull it out of a global recession.
This month, credit rating agency Moody’s issued an unprecedented debt downgrade warning to the entire world.
Ironically, it bases this assessment on political unrest, ignoring the turbulent financial conditions that arguably have exacerbated inequalities which in turn are fuelling global unrest. Our own obsession with credit rating agencies is misplaced. In the end, the global capital markets (which in themselves are often not so rational) may be informed by what these agencies have to say, but they will make up their own minds where to invest. It is not unheard of to have some junk bonds with lower interest yields than investment graded bonds. Indeed, according to this report by Quartz, some European junk bonds carry negative yields.
It is too much to expect that our looming junk bond status can enjoy a similar fate. But it is not too much to expect continued downward pressure on our bond yields in the low interest rate environment. We would do far better by paying less attention to credit agency ratings and focusing more directly and regularly on what is happening in the global capital markets and wooing investors directly there.
Who we owe the debt to
And then there is the famous theory of distinguished American Nobel prize-winning economist Paul Krugman, who recently tweeted again that “Debt is money we owe ourselves”.
This may explain why many orthodox economists, including our own, are quite comfortable in their belief that debt, as an instrument of creating money and essential to the economic construct, can simply be passed on and on and on … . It is the ultimate expression of the modern economist and academic trend of seeing things as a collective; to aggregate and create abstracts. I leave you to have fun with that mind-twister, as many others have had.
But I cannot help but think about the legacy we are leaving future generations. The short-termism of the last few decades has created something far more ominous.
In information technology they call it technical debt, which means investing in cheap and outdated software or hardware, only to be faced with much higher costs in future replacement.
We can call it future debt – an unknown, unquantifiable debt that will face future generations simply because we did not have the foresight to provide for it in the present.
Maintenance neglect is just one, and we have seen how our failure to provide for future electricity needs has virtually crippled our economy. There are many similar to that – huge investments that have to be made to provide for future generations, including dealing with the effects of climate change.
Every time period has a mix of at least three generations. In that time the younger will always call the older to account – at times with great disturbance and even violence. We are seeing that now.
I can see Greta Thunberg pointing at my passing generation and saying: “Shame on you!”