The debt dilemma

I have mentioned many times on this blog that rising global debt reduces the ability of capitalist economies to avoid slumps and find quick way to recover (and see ‘Debt Matters’ in my book, The Long Depression and also in World in Crisis).

As Marx explained, credit is a necessary component in oiling the wheels of capitalist accumulation, by making it possible for investment in longer and larger projects to be financed when recycled profits are not sufficient; and in more efficiently circulating capital for investment and production.  But credit becomes debt and, while it can help expand capital accumulation, if profits do not materialise sufficiently to service that debt (ie pay it back with interest to the lenders), the debt becomes a burden that eats into the profits and ability of capital to expand.

Moreover, two other things happen.  In order to meet the obligations of existing debt, weaker companies are forced into borrowing more to cover debt servicing, and so debt spirals upwards.  Also, the return over risk on lending for creditors can now appear to be higher than investing in productive capital, especially if the borrower is the government, a much safer debtor.  So speculation in financial assets in the form of bonds and other debt instruments increases.  But if there is a crisis in production and investment, perhaps partly caused by excessive debt servicing costs, then the ability of capitalist corporations to recover and start a new boom is weakened because of the debt burden.

In the current coronacrisis, the slump is accompanied by high global debt, both public, corporate and household. The Institute of International Finance, a trade body, estimates that global debt, both public and private, topped $255tn at the end of 2019. That is $87tn higher than at the onset of the 2008 crisis and it is undoubtedly going to be very much higher as a result of the pandemic. As Robert Armstrong of the FT put it: “the pandemic poses especially big economic hazards to companies with highly leveraged balance sheets, a group that now includes much of the corporate world. Yet the only viable short-term solution is to borrow more, to survive until the crisis passes. The result: companies will hit the next crisis with even more precarious debt piles.”

As Armstrong points out, “in the US, non-financial corporate debt was about $10tn at the start of the crisis. At 47 per cent of gross domestic product, it has never been greater. Under normal conditions this would not be a problem, because record-low interest rates have made debt easier to bear. Corporate bosses, by levering up, have only followed the incentives presented to them. Debt is cheap and tax deductible so using more of it boosts earnings.  But in a crisis, whatever its price, debt turns radioactive. As revenues plummet, interest payments loom large. Debt maturities become mortal threats. The chance of contagious defaults rises, and the system creaks.”

He goes on,“this is happening now and, as they always do, companies are reaching for more debt to stay afloat. US companies sold $32bn in junk-rated debt in April, the biggest month in three years.”  Armstrong is at a loss to know what to do.  “Containing corporate debt by regulating lenders is also unlikely to work. After the financial crisis, bank capital requirements were made stiffer. The leverage merely slithered off of bank balance sheets and re-emerged in the shadow banking system. A more promising step would be to end the tax deductibility of interest. Privileging one set of capital providers (lenders) over another (shareholders) never made sense and it encourages debt.”

Martin Wolf, the FT’s economics guru, reckons he has an answer.  You see, the problem is that there is too much saving in the world and not enough spending.  And this ‘savings glut’ means that debtors can borrow at very low interest rates in a never-ending spiral upwards.  Wolf bases his analysis on the work of mainstream economists, Atif Mian and Amir Sufi.  Mian and Sufi wrote a book a few years ago entitled House of Debt, which I reviewed at the time. It was considered by Keynesian guru, Larry Summers as “the best book this century”! 

For the authors, debt is the main problem of capitalist economies, so all we have to do is sort it. What is odd about their argument is that, while they recognise that public sector debt was not the cause of the Great Recession as neoliberal austerity economists try to claim, they put the blame for the Great Recession not on corporate debt nor on financial panic, but on rising household debt.  They claim that “both the Great Recession and Great Depression were preceded by a large run-up in household debt… And these depressions both started with a large drop in household spending.” Mian and Sufi show with a range of empirical studies that the bigger the debt rises in an economy, the harder the fall in consumer spending in the slump. But they fail to note that it is a fall in business investment that presages crises in capitalist production, not a fall in household spending.  I and others have provided much empirical evidence on this.

In their original book, Mian and Sufi do not address the reason for the inexorable rise in debt, corporate and household, from the early 1980s onwards. Now in new studies, cited by Martin Wolf, Mian and Sufi offer a reason.  The spiral of (household) debt was caused by the rich getting richer and saving more, while the bottom of the income ladder got less and so saved less.  The rich did not invest their extra riches in productive investment but hoarded it, or put it into financial speculation, or lent it back to the poor through mortgages.  So household debt spiralled because a “savings glut” of the rich.

The rich got richer and saved more, while investment in productive assets slipped away.

So the ‘savings glut’ of the rich is the cause of the low investment and productivity growth of major capitalist economies.

Mian and Sufi argue in their second paper that because poorer households borrowed more, forced by low incomes and encouraged by low interest rates made possible by the savings glut of the rich, household debt spiralled to the point that it reduced ‘aggregate demand’ and slowed down economic growth in a form of ‘secular stagnation’.  This theory of ‘indebted demand’ is when “demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap”.  This is how much debt servicing would have cost if interest rates had not dropped after the 1980s.

Wolf cites another version of the same argument that too much debt is caused by too much saving and is the cause of crises in capitalism. This comes from the post-Keynesian Minsky school.  David Levy, head of the Jerome Levy Forecasting Center argues in a paper, Bubble or Nothing, that “aggregate debt grew faster than aggregate income” so “making financial activity increasingly hazardous and compelling riskier behavior.”  Levy sees the risk not in the size of the debt so much as its increasing fragility, as Minsky argued.

Unlike Mian and Sufi however, Levy correctly points to the importance of rising corporate debt, not household debt. The nonfinancial corporate sector’s debt-to-gross-value-added ratio is near a new all-time high.

Moreover, if one excludes the largest 5% of listed corporations, the corporate leverage picture is more extreme and worrisome (chart 45). One indication of the risk associated with this increased corporate leverage is the profound rise in the proportion of companies with ratings just above junk levels in the past 10 years.”

Again Levy shows that “since the mid-1980s, the U.S. economy has been swept up in a series of increasingly balance-sheet-dominated cycles, each cycle involving to some degree reckless borrowing and asset speculation leading to financial crisis, deflationary pressures, and prolonged economic weakness.”  In other words, rather than invest in productive assets, corporations switched to mergers and financial speculation so that much of their profits increasingly came from capital gains rather than profits from production.

Profitability relative to the stock market value of companies fell sharply – or more precisely, the stock market value of companies rocketed compared with annual earnings from production.

Levy concludes that “without balance sheet expansion (ie buying financial assets), it is exceedingly difficult to achieve the profits necessary for the economy to function. Moreover, once those profits are achieved, it is also exceedingly difficult to stop households and businesses from responding by borrowing and investing, thus reaccelerating balance sheet expansion and defeating the entire purpose. Bubble or nothing.”

What do we really learn from all this?  Mian and Sufi emphasise rising inequality from the 1980s, a shift in income from the poorer to the top 1%, leading to a rise in household debt and a savings glut.  But they do not explain why there was rising inequality from the early 1980s and they ignore the rise in corporate debt which is surely more relevant to capital accumulation and the capitalist economy.  Household debt rose because of mortgage lending at cheaper rates, but in my view that was the result of the change in nature of capitalist accumulation from the 1980s, not the cause.

And actually Mian and Sufi hint at this. They note that the rise in inequality from the early 1980s “reflected shifts in technology and globalization that began in the 1980s.”  Exactly. What happened in the early 1980s?  The profitability of productive capital had reached a new low in most major capitalist economies (the evidence for this overwhelming – see World in Crisis).

The deep slump of 1980-2 decimated manufacturing sectors in the global north and weakened labour unions for a generation.  The basis was set for so-called neoliberal policies to try and raise the profitability of capital through a rise in the rate of exploitation.  And it was the basis for a switch of capital out of productive sectors in the ‘global north’ to the ‘global south’ and into the fictitious capital of the financial sector.  Ploughing profits and borrowed money into bonds and equities drove down interest rates and drove up capital gains and stock prices.  Companies launched a never-ending programme of buying back their own shares to boost stock prices and borrowing to do so.

But this did not reduce ‘aggregate demand’; on the contrary, household consumption rose to new highs.  What ended this speculative credit boom was the turning down in the profitability of capital from the end of the 1990s, leading to the mild ‘hi-tech’ bubble burst of 2001 and eventually to the financial crash and Great Recession of 2008. A ‘savings glut’ is really one side of an ‘investment dearth’.  Low profitability in productive assets became a debt-fuelled speculative bubble in fictitious assets.  Crises are not the result of an ‘indebted demand’ deficit; but are caused by a profitability deficit.

But how does capitalism get out of this debt trap? This is the debt dilemma.

Wolf and Mian and Sufi reckon that it is through the redistribution of income.  Wolf cites Marriner Eccles, head of the US Federal Reserve in the Great Depression of the 1930s.  In 1933, Eccles told Congress, “It is for the interests of the well to do . . . that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit.” So you see, it is in the interests of the rich to let the government take some of their money to help the poor to boost consumption.

Mian and Sufi say: “Escaping a debt trap requires consideration of less standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.”  So we need to reduce the high inequality by addressing “structural sources”. In my view, that means addressing structural features like the rising concentration and centralisation of the means of production and finance, not just a rising inequality of income.

Indeed, Wolf appears to take a more radical view: “we have a huge opportunity now to replace government lending to companies in the Covid-19 crisis with equity purchases. Indeed, at current ultra-low interest rates, governments could create instantaneous sovereign wealth funds very cheap!” So the state should intervene and buy up the shares of those companies with large debts that they cannot service.  But in effect, this would mean governments buying weak companies that are already ‘zombies’, while the powerful and profitable corporations remain untouched.  This is government aiming to save capitalism, not replace it.  Here Wolf follows closely the line of the FT itself that “Free markets must be protected through the pandemic, with sensible and targeted state intervention that can help capitalism to thrive post-crisis.”

In contrast, Levy is pessimistic that there is any solution that avoids slumps: “there is neither a realistic set of federal policies to painlessly solve the Big Balance Sheet Economy dilemma nor even a blueprint of what the optimal policies should be.”  Marx would agree that the only way out of this slump is through the slump.  Former IMF chief, the (infamous) Dominic Strauss Kahn reckons that the strategists of capital must just allow the liquidation of the zombies and unemployment to rise because then “the economic crisis, by destroying capital, can provide a way out. The investment opportunities created by the collapse of part of the production apparatus, like the effect on prices of support measures, can revive the process of creative destruction described by Schumpeter.”  

To end the spiral of debt and fictitious capital will require much more than taxing the rich more or buying up weaker companies with government debt.  As Wolf says: “We will have to adopt more radical alternatives. A crisis is a superb a time to change course. Let us start right now.”  Of course, he means to save capitalism, not replace it.

32 thoughts on “The debt dilemma

  1. Hi Michael,

    I find your posts exceedingly valuable, and I cite them frequently.

    They would be even more useful if you dated them.

    Would you kindly do this for us?

    Thank you

    Susan Rosenthal

    Socialism is the best medicine

    1. my view of the alleged lack of inflation:
      wherever the excess money of the central banks goes, inflation can also be found there: e.g. on the stock market, real estate, and interest rates. The fact that money no longer pays interest means that money loses its value.
      However, the excess money does not reach the normal commodity market, which goes into the reproduction of wage labor. Therefore, inflation can hardly be found there.
      Wal Buchenberg, Hannover

      1. Aha! Here is the most elegant explanation of inflation, or lack of it, that I have found. Inflation does not effect everything equality. It goes where the money goes.

        What interests me is what will happen when the USA can no longer import “Walmart” goods from China. It can’t produce anything at home anymore. It seems to me that they will then start getting inflation in commodities.

        It also occurs to me that if they then started trying to bail out their working classes with a “Basic Income” it would be counterproductive; again just create an inflation in commodities. That gets me back to my comment from yesterday, about taxing wealth to pay for a demogrant.

        Even that would not work without either making arrangements with China, building up domestic production again, or more likely both. So debt/inflation risk is a hard problem to unravel.

        Except the investor class likely thinks it does not have to bother with unraveling it. Even if there is an economic collapse and a deflation in Real Estate, Stock Market, etc, they probably think they can just take the paper losses and ride it out. They will still own everything.

        There! Brr! Frightening to think about! But it confirms my thesis that a Basic income just will not work without the abolition of capitalism.

        Comment if you please. Keep up the good work, all. This is one of the most interesting Blogs on the net.

      2. Those of us who follow the ramblings of other, non-Marxian heterodox schools of economics will recognize this phenomenon as the Cantillon Effect. Basically, this thought is that newly printed money is not absorbed by the entire economy all at once, but behaves in a diffusion-like process, inflating prices at the point of injection first, and all other prices only later.

  2. At this point, the capitalist class must be focusing in two things:

    1) avoiding popular revolts throughout this pandemic (tactical level);

    2) hoping for the next cycle of Kondratiev to begin as soon as possible (strategic level).

    That is, assuming Kondratiev cycles are real.

    Even if the next revolutionary technology comes out, there’s still the problem of corporate debt, as noticed. Let’s say nuclear fusion comes out – will its rise in labor productivity result in a profit rate high enough to accommodate all the existing (and ever growing) debt? There’s no way the capitalist class can know that.

    That’s why I think a big war is on the agenda, as destruction of old capital opens way to the new technologies.

  3. Hi, Robert. Here is my prescription for what ails the US economy, and every other western economy. Wealth tax on individuals, excess profits tax on corporations.

    Use the new revenue to repair infrastructure, pay normal people a demogrant, and set up public investment banks. Abolish private banks, expropriate and liquidate their assets. Close stock markets.

  4. De nuevo, muy interesantes aportes de Michael Roberts, que intentamos citar en algunos comentarios sobre economía. Es claro que ya el sistema capitalista no da para más y urge el cambio revolucionario por el socialismo, “basado en la solidaridad y en l a satisfacción armoniosa de las necesidades del hombre”, es decir, en armonía con la naturaleza. Obviamente, no estamos hablando de las parodias “socialistas” montadas por el estalinismo. Muchas gracias, de nuevo, por enviarnos sus escritos.

  5. Robert; I’m not quite certain that I understand the situation:
    The total globalized money-capital has become so big that it is not possible to get even a rather small rate of interest from all of it?
    The total real capital around the globe has become so big that it is not possible to get even a small rate of profit from all of that?
    The average productivity of human labor has reached a level where it takes planned and costly action (sanctions or war) to keep humans starved or even hungry?

    1. Thomas Yes it is a bit of conundrum. There are a few pointers to why there is low inflation and whether it will come back. Mino Carchedi and I are working on a more comprehensive Marxist theory of inflation right now. We’ll see if we can come up with anything coherent.

    2. my view of the alleged lack of inflation: wherever the excess money of the central banks goes, inflation can also be found there: e.g. on the stock market, real estate, and interest rates. The fact that money no longer pays interest means that money loses its value.
      However, the excess money does not reach the normal commodity market, which goes into the reproduction of wage labor. Therefore, inflation can hardly be found there.
      Wal Buchenberg, Hannover

  6. Am I right in assuming that the main creditors of that humungous debt are states like China and Japan, banks, and wealthy people all over the world? But in what proportion?

  7. Michael:

    To me it seems that much of what Marx predicted as far as crises ripping capitalism apart was forestalled for many decades by imperialism hauling in new markets, new raw materials, and new labor forces, keeping profit rates high for a time as a significant countervailing tendency to the TRPF. Now it seems imperialist expansion has basically reached its limit, and there is very little that HASN’T been pulled into this or that imperialist’s orbit. Now it seems Marx’s predictions of ever-worsening crises are coming true, and this time there is no escape.

    You once wrote a comment on one of your articles that intrigued me–you loosely projected the rate of profit hitting 0% around 2060. I think you explained then that this is more of a mathematical horizon than something you literally expect to see, which makes sense to me. But on the other hand, the rate of profit *will* keep falling, and it *will* more and more “skim off of” 0% as we approach that date.

    What concrete manifestations should we expect from this “approach to zero”? I am not a scholar, but it seems to me it would entail:

    1. More frequent recessions/depressions
    2. Longer recessions/depressions
    3. More catastrophic recessions/depressions
    4. Maybe something like an unending recession–where the “recoveries” have lower benchmarks than even the recessionary periods of yesteryear.

    What would you say?

    Feel free to simply refer me to blog posts you’ve written about anything I’m mentioning or asking about here rather than rewrite observations you’ve already made!

    Thank you as always. Your blog has taught me a ton.

    1. Unfortunately, since ww1 (which for some had signaled that capitalism had reached it’s limits of expansion) war has been its last resort for the productive destruction (Isfan Mesaros has called it “destructive production) of capital and renewal of profitability. Since then we have been, particularly under US leadership, under a state of permanent war. Now the war drums have been beating loud and clear in the western “democracies”. VK above has predicted a major war (a catastrophe much worse that Covid19), but as productive destruction and leading to new technologies, but without explanation.

  8. There is one thing that is being ignored in all analyzes. The slaughterhouse stop left supermarkets without meat. It’s evident!
    The need for industrial sectors to need workers to continue to work because if not the whole service sector would stop or cities would starve to death was clear.
    This obligation to work served to make things evident, but hidden, clear, that without energy, transport and food the world does not work.
    We have to look at the sectors that have not stopped and the power of these working classes has become evident to everyone and especially to them.
    All this, with employment or unemployment in the service sector, again creates a class consciousness that will bear fruit.

  9. i think someone (michael pettis?, yourself?) wrote that it was private (corporate, household, etc.) debt which could explain the lead-up to the stagflation of the 70s. 🙂

  10. I’m aware this is not the most appropriate place for such a question but Mr Roberts I was wondering if you had any recommendations for studying economics at the academic level. Currently residing in rural United States but not opposed in any way to studying abroad.

    1. I’m not really an expert on the best places to study economics as I am not an academic but was a working economist. If you want a more non-mainstream ‘heterodox’ academic course, the I think the places to go are: New School of Research, New York, Univ of Massachusetts Amherst, University of Utah; and in the UK, SOAS, University of Leeds and Kingston University. But I’m sure readers know better than me.

    2. TW,

      Michael’s suggestions are good, although I am not sure about the current situation at Kingston — you might contact Rex McKenzie ( for an informal discussion.

      In the UK you might also consider the University of Greenwich (grandest campus in London, if not the whole UK), and the University of the West of England.

  11. Hi Michael,

    I watched an interview with economist Stephanie Kelton on Yanis Varoufakis’s show a couple of weeks ago. She is a proponent of MMT as I am sure you are aware. Thinking about this idea of debt, what are your views on MMT? For me this is just a thought experiment as we have to move beyond commodity production. And if MMT were plausible would it not just encourage more excessive growth?

    1. Hi Andrew My views on MMT have been covered in several posts on this blog. Just search MMT and that should keep you busy! You are right. MMT does not consider the social structure of the economy – it assumes that expanding money will create growth and full employment within capitalism. And it has nothing to say on what sort of growth.

      1. Thanks for your reply Michael. I enjoy your blog. I’ll have a look at your thoughts on MMT. Even though I don’t agree with MMT, I was minoring in economics at university so I do like to think about these things.

        I also co-host a show. We’ve been covering your blog quite a bit each week on our show –

        A weekly show discussing news and events within the Marxist community.

    2. It seems to me that this conversation regarding capitalism’s debt dilemma–which most followers of this blog will recognize as capitalism’s attempt to counter overproduction, falling profitability, and financiers’ reluctance to invest–has meandered off track. Of course, capitalism cannot “move beyond commodity production”. Capitalism would have to be physically overthrown for society to move beyond commodity production.

      The United States is in now in the process of leveraging an actual public debt of $450 billion into a potential debt of about 6 trillion dollars to bail out a financial system that is still in the throes of 2008’s leveraged debt dilemma. This is an example of mmt as it operates within a capitalist system, the only system in which it can operate.

      As Roberts points out, capitalism has no solution for its crises (except more crises), and was about to fall into a deep recession, when Covid19 (another, predictable corona type virus) provided a convenient (for the big bourgeoisie and its economists and cops) distraction.

      For me two big questions arise from the present crisis that are not being addressed: (1) why do most economists, including marxist economists, attribute the severity of the present down turn to the virus alone, at least implying that things will somehow get better once the lock downs have been lifted? 36 million, precarious, poorly paid workers have now applied for unemployment in the US, and the unemployment rate has risen above 14% Is the pandemic driving the unemployment rate or are we witnessing an recession riding atop a real, but manipulated pandemic? During the first great depression the unemployment rate reached over 24% by 1932. It fell and rose somewhat afterward, until it reached 19% 1939, during a war production boom. Then it fell precipitately after the US entered the war. Question: where is the productive labor (other than in China and the global south) that can create the wealth to pay for the de-industrialized West’s leverage debt dilemma? Will productive destruction with each country (bankruptcy rather than war) work in reviving economies that have off-shored the production of wage goods? (2) how real are the present threats of major war? Is it humanly possible (though it’s been said capitalists are human too) to think of war as productive destruction of capital. What can be done?

      1. ….it also posted before I could correct too many other typos, e.g. with for within, precipitately for precipitously, etc.

    1. Jorge – with a quick glance, it looks like a really thorough and interesting empirical work. But I would need to study it in detail over time. But thanks for bringing it to my attention.

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