“Debt is the slavery of the free.”
– Publilius Syrus
Debt and indebtedness are very much the norm for most of us in the current clime. In fact, the modern economy runs on debt at all levels. We individual consumers are most likely in debt to banks and other financial institutions. Our governments are in debt, with the Australian Government gross debt running at $884.9 billion as of late October 2022. The federal government has been in serious debt since the Global Financial Crisis (GFC) in 2008.
“The October 2022–23 Budget forecasts further increases in gross debt to $1.159 trillion (43.1% of GDP) by the end of the 2025–26 financial year.”
– Budget Review, 2022-23
Australia is not alone in this state of financial affairs, with the US federal government debt at US$31.38 trillion as of February 2023. President Biden has a fight on his hands because he wants to raise the debt limit to meet his government’s budgetary obligations and the Republican controlled Congress will make things difficult on this score. The American national debt has been larger than their GDP for a number of years, which is pretty impressive in economic terms. (Drew Desilver, Pew Research, 14th Feb 2023) Impressive in that it goes against all the rules of classical economics, but that kind of economics was left behind back in the 1980s and 1990s when Neoclassical economics took over. Milton Friedman and the Chicago School of Economics inspired the governments of Ronald Reagan and Margaret Thatcher to ditch the old principles in favour of a new handbook. Monetarism and the trickle-down effect would come into parlance. This is when the brakes came off via deregulation of the banking sector and banks started producing their own money irrespective of the gold standard. President Nixon in 1971 had ended the gold standard monetary system. Governments were encouraged to go into debt on a grand scale to fund spending that would promote investment across the board. This was the start of the global economic love affair with debt, which is still with us today, as can be seen by the huge figures quoted above.
Credit & The Modern Market
Capitalism, as an economic system, demands continual growth and this growth would not be possible without all and sundry going into debt to fund the rapacious appetite of modern markets. From the mid 19C, debt in the form of bank loans and public bonds financed the expansion of businesses. Max Weber said that “in modern economic life, the issue of credit instruments is a means for the rational assembly of capital.”
“President Richard Nixon’s decision to end the Bretton Woods international monetary system in the early 1970s opened a Pandora’s Box of mobile cross-border finance. Deregulation, spearheaded by the creation of structured derivatives, immediately achieved prominent emphasis. The following decade, under President Ronald Reagan in the United States and Prime Minister Margaret Thatcher in the United Kingdom, a wave of product innovation ensured that the “Box” could never again be shut.”
– Sebastien Canderie, 24th March 2021
Debt Is Not A Dirty Word
Prior to the take over by Friedman and Neoclassical economics, governments only used to get into huge debts, greater than their GDP, following world wars. Now, debt is what we all have for dinner every night of the week. Debt has become ‘all duck, no dinner’ to economies everywhere. Debt used to be a dirty word back in the day. Debt used to get you locked up in the Dickensian era, as Hard Times told us in no uncertain terms. Today, we positively encourage our citizens to go into debt here in Australia and right around the western world. Credit is offered like lollies to little kids in all shapes and sizes. Our economies are like drug addicts in constant need of a fix in the form of debt to keep the wheels turning. Constant economic growth feeds on consumerism funded by debt.
Confused Australians & The Spending Trend
Australians, until very recently, were encouraged by banks and the economic system to take our huge bank loans to buy property. Million dollar home purchases funded by debt to banks to the tune of around 78% in 2021, before the inflation spiral caused interest rates to shoot up. The great Aussie dream of owning your own home was predicated on such financial deep debt dealings. We had a decade and a half of record low interest rates. It is no wonder Australians have been stubborn in their spending behaviour and that the fastest series of 9 consecutive interest rate rises by the RBA have taken time to bite.
We all could be forgiven for feeling confused about what the right kind of economic behaviour should be after years of borrowing and spending.
Debtism: A New Term For A New Day
The level of debt and its pervasiveness have called for a new term to describe the governing economic system in the western world. Debt drives the monetary show rather than capital in our modern economies. The dangers of such a debt addiction can be seen by the numerous economic crises we have experienced amid all this debt funded growth in markets.
“This colossal credit creation inspired the junk bond mania and savings and loan failures of the Roaring ’80s, emerging market crises in Mexico, Southeast Asia, and Russia in the 1990s, and the proliferation of leveraged buyouts (LBOs) as well as the subprime mortgage lending frenzy both before and after the turn of the millennium.”
– Sebastien Canderie, 24th March 2021
The Reserve Bank of Australia Printing Money
“Do you remember how the Reserve Bank printed a huge amount of money in the pandemic?
Have you been wondering if it’s responsible for the inflation we’re seeing?
The RBA says it’s a complicated question to answer, and it’s trying to encourage people to think more deeply about money itself.”
– Gareth Hutchins, ABC News, 25th Sept 2022
The RBA and the US Federal Reserve have printed large amounts of money through recent times to stave off economic disasters during the pandemic. The RBA was involved in ‘quantitative easing’ to the tune of $100 billion in 2020. This was a manipulation of interest rate via the RBA buying Australian government bonds. The RBA just pushes a few buttons on the seller’s account and, thus, this is akin to printing money. Central banks globally were involved in such manipulations during the pandemic to fund their governmental economic programs. The inflationary effect of such behaviours have been questioned by a number of economists. Milton Friedman was one of those economists who considered it to be inflationary. Friedman died in 2006.
Why Can’t We Just Print More Money?
Economic thinking goes like this. If more money is printed, then the supply of money is increased, and demand for goods increases on the back of this extra money in the system. If, however, the supply of the goods stays the same, then prices increase. Therefore, what you purchased at a certain amount now costs more for the same thing. This is inflation. However, the RBA would point out that it is how this liquidity is released into the economy that makes all the difference to whether it is inflationary.
– https://www.youtube.com/watch?v=3-dvi1f_2vA
Different Kinds of Debt Deserving of Very Different Economic Outcomes
Whilst our governments are in debt to the tune of billions and trillions of dollars and nobody pays a penalty for such behaviour, it is not the same for you and me. Individuals are adjudged very differently if they are unable to pay off their debts.
The Robodebt Scheme: A Punitive Approach
The Morrison government instigated an automated debt collecting process, which would become known as Robodebt. There is a Royal Commission into the Robodebt Scheme currently underway. The illegal use of income averaging upon those Australians receiving welfare assistance caused untold havoc in the lives of many, including a number of people taking their own lives. The scheme was the subject of a class action and has cost the government and tax payers hundreds of millions of dollars. What has, also, been revealed in this economic targeting of the most vulnerable members of our population is a culture of callousness, dishonesty, and disregard for the law among public servants and government ministers. Lawyers for the government were aware of the illegality of the scheme for a number of years and did nothing. Likewise, senior bureaucrats were more concerned about their own ambitions and job security rather than doing the right thing. It is a distressing reflection of the culture of government and their minions in the current Australia. Of course, nobody will be prosecuted, as these kinds of white collar crimes never are in Australia. Accountants, lawyers, and public servants in government echelons are immune, as individual responsibility for actions causing damage to the economy and people’s lives is never established in this grey zone.
“It is no coincidence that the worst examples of retribution and wrath in the former Coalition government have come from powerful men – almost always – singularly possessed of their God’s assurance. Even Alan Tudge, having been so meticulously dissected on the stand at the Royal Commission into the Robodebt Scheme that his failures made Christian Porter look compassionate, claimed in his resignation in parliament not nine days later that one of his greatest legacies was welfare reform. It was a display of a kind of breathtaking audacity that can only come from those abandoned by self-doubt.
Take your pick of Scott Morrison, Tony Abbott, Stuart Robert or Alan Tudge. Each had a particular appetite for vengeance, and each had a role in a scandalous chapter of Australian government history.
It involved punishment of people, dead or alive, whose cases and complaints made it into media reports. Alan Tudge, the then minister for human services, found there was no bar so low that he couldn’t contort himself and slide under it. He collected the Centrelink files of every single person who complained in newspapers, radio or television, and authorised the release of their data to selected favourite journalists in order to “correct misinformation”.
In the case of 28-year-old florist and musician Rhys Cauzzo, who killed himself after being harassed by Centrelink for a debt that arose from the illegal use of income averaging, Tudge’s most senior adviser cautioned against “discussing the wrongdoing [sic] of a person who committed suicide” because it “would be a bad look”.
“Tudge’s office did it anyway, backgrounding journalists with information that turned out to be incorrect in order to fight the ghost of a man who was broken by the very system the minister was determined to defend.”
– Rick Morton, The Monthly, March 2023
Debt for these poor people was adjudged very differently from the way governments and corporations view their mammoth levels of debt. The Coalition government ministers brought a righteous quality to their fiscal punishment of ‘so-called’ welfare cheats, who were in fact ordinary Australians doing it tough. Political parties like to establish narratives of blame that play well in the media and the electorate. Easy answers and villains for finger pointing and harsh judgemental opinions and behaviours.
The Global Financial Crisis
“The crisis was the worst U.S. economic disaster since the Great Depression. In the United States, the stock market plummeted, wiping out nearly $8 trillion in value between late 2007 and 2009. Unemployment climbed, peaking at 10 percent in October 2009. Americans lost $9.8 trillion in wealth as their home values plummeted and their retirement accounts vaporized.”
– Renae Merle, Washington Post, 10th Sept 2018
In 2008, the Global Financial Crisis saw bankers lose untold billions of dollars in the United States and elsewhere.
Institutions and companies crashed costing the economic lives of millions of people around the world. Governments were forced to bail out these bankers and their companies because they were too big to fail and would have destroyed the whole economy. Nobody has been jailed or held responsible for the wanton subprime loans debacle. Indeed, investment banks like Goldman Sachs would emerge stronger and pay their executives large bonuses out of the Federal Reserve’s bail out money.
This is the cushy treatment handed out to those on the inside of the system in stark contrast to the victims of Robodebt. You and I can be taken to task for our profligate financial behaviour but banking corporations walk on water when it comes to capitalism or debtism and how they are ultimately adjudged. In the case of Robodebt, these Australians were entirely innocent and victimised by a wrathful government because they appeared weak and were low hanging fruit.
Dealing With Your Debt & The Credit Reporting System
If you have been struggling with the increased cost of living in Australia it pays to ensure your understanding of the credit reporting system. Getting credit is dependent upon your consumer credit file and score. Bankers may walk on water when it comes to their liquidity but you and I have no such guaranteed buoyancy in the current economic climate. High inflation at 7.8%, as of the last December quarter, means our purchasing power has been seriously diminished. We are all getting less bang for our buck, when it comes to buying the essentials like food, energy, and paying rent. Prices for everything have gone up across the board. Interest rates are on a skyrocketing upward spiral for those paying off large home loans. This has a flow-on effect all through the economy – dampening spending and economic growth. Unemployment is beginning to get ready to rise after falling to record lows – it is currently at:
“In trend terms, in January 2023: unemployment rate remained at 3.5%. participation rate decreased to 66.5%.”
– ABS, Labour Force, Australia, January 2023
The future is not looking rosy and for many it is already a dire economic struggle. Have you recently checked your consumer credit report? Your ability to get credit at the best rate is dependent upon the health and wellbeing of your credit file. The smartest move you can make is to request a free copy of your file from each of the 3 credit bureaus.
Experian Ph. 1300 783 684
Illion Ph. 1300 734 806
Equifax Ph. 138 332
You are entitled to a free copy of each report every 3 months or in the advent of being refused credit. Examine your file with a fine tooth comb. Check every listing and date for errors and mistakes. Your credit report must be a true and correct account of your financial history. If you find any errors, you can apply to the institutions involved to correct them and remove the false information. You may wish to engage some expert legal assistance in this if you are unsure of your rights and their obligations under The Privacy Act 1988 (Cth). An understanding of credit reporting law can make your navigation of the system more constructively to your benefit going forward. Only those listings that are in error can be removed from your consumer credit file. There are time frames and schedules for how long data and determinations remain on your file.
Specialist credit reporting lawyers such as ours may charge fees on a No Win No Fee basis. It is important to note that many of the credit repair firms advertising online are not qualified or legally trained, be vigilant in your scrutiny of those making claims about the repair to your credit score they can achieve on your behalf.
Does Debt Have A Future?
Many people are worried about the exorbitant debt levels throughout government and the economy more generally. Can we just keep on living on credit forever? It goes against the grain for those of us with old fashioned ideas of right and wrong, and steeped in the morality of meeting our financial obligations.
Servicing the government debt in Australia costs:
“ the past, current and estimated interest cost to the Australian Government of servicing AGS on issue. Budget paper no. 1 2022–23 (p. 349) shows that the interest cost of servicing AGS on issue during 2021–22 is about $17.5 billion and is estimated to rise to $26.3 billion by 2025–26 in nominal terms.”
– Budget Review, 2022-23
In America, it will cost US$395.5 billion to service their debt this financial year.
A working paper from the IMF suggests that advanced economies in good standing may have an infinite government debt capacity. This flies in the face of the austerity policies imposed on nations like Greece and Spain recently, following the GFC. Housekeeping philosophies are undergoing evolutionary shifts in economic terms. The US economy most likely falls into that ‘too big to fail’ category. The bankers and economists are bailing themselves out again and again in a merry cycle it seems. The rest of the world looks on and hopes the bubble will never burst.
Meanwhile, the old rules around debt still apply to you and me, unfortunately. Perhaps, if we all register ourselves as corporations, in the near future, we can free our own economies from such outdated concepts as responsibility and consequences for actions. Words of advice from your life coach may now be –‘Talk like a banker, walk like a banker’. Smile and carry an all-weather umbrella courtesy of Goldman Sachs or Macquarie Bank, perhaps. The current status quo seems a bit like the unresolvable realities of the macro and quantum realms. Different rules apply to the chagrin of the ordinary consumer. What makes sense in one sphere does not compute in the other. Debt is here to stay, in the state of debtism; it is only a question of whether we can make it work for us like governments and bankers?
References
ABS, Labour Force, Australia, Jan 2023, Viewed 25th February 2023.
Barrett Philip, Interest-Growth Differentials and Debt Limits in Advanced Economies, IMF Working Paper, 6th April 2018, Viewed 24th February 2023.
Behan Ann, Who Was Milton Friedman and What Is Monetarism?, Investopedia, 4th May 2022, Viewed 24th February 2023.
Canderie Sebastien, Capitalism is Dead, Long Live Debtism, https://blogs.cfainstitute.org/investor/2021/03/24/capitalism-is-dead-long-live-debtism/, 24th March 2021, Viewed 25th February 2023.
Desilver Drew, 5 facts about the US, national debt, Pew Research Centre, 14th Feb 2023, Viewed 25th February 2023.
Hutchens Gareth, The RBA has begun ‘quantitative easing’. What is it, and how does it work?, ABC News, 4th Nov 2020, Viewed 25th February 2023.
Merle Renae, A guide to the financial crisis- 10 years later, The Washington Post, 10th Dec 2018, Viewed 25th February 2023.
Morton Rick, Robodebt and the empathy bypass, The Monthly, March 2023, Viewed 25th February 2023
O’Brien Gregory, Australian Government debt, Budget Review October 2022-23, Australian Parliament House, Viewed 26th February 2023.