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S7 E3: Sasha Breger Bush, Is there a Global Debt Crisis?
10 Plays1 year ago
Sasha Breger Bush is an Associate Professor of political science at the University of Colorado Denver, who studies international political economy, and the author of Derivatives and Development: A Political Economy of Global Finance, Farming, and Poverty. Prof. Bush has recently sounded the alarm on what she calls the whole world debt crisis. We discuss her work, as well as recent public debates about debt and deficits in the United States.
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Transcript
Introduction
00:00:01
Speaker
Welcome back to the Free Mind podcast, where we explore topics in Western history, politics, philosophy, literature, and current events with a laser focus on seeking the truth and an adventurous disregard for ideological and academic fashions.
Introduction of Guest: Sasha Brieger-Busch
00:00:15
Speaker
I'm Matt Burgess, an assistant professor of environmental studies and faculty fellow at the Benson Center for the Study of Western Civilization at the University of Colorado Boulder.
00:00:24
Speaker
My guest today is Sasha Brieger-Busch.
Global Debt Crisis
00:00:27
Speaker
Sasha Brieger-Busch is an associate professor of political science at the University of Colorado Denver, who studies international political economy and is the author of Derivatives and Development, A Political Economy of Global Finance, Farming and Poverty. Professor Busch has recently sounded the alarm about what she calls the whole world debt crisis. We discuss her work as well as recent public debates about debt and deficits in the United States.
00:00:52
Speaker
Sasha Brieger-Busch, welcome to the Free Mind podcast. Thanks, Matt. Glad to be here. I wanted to have you on because you do some really interesting thinking and writing on an issue that I've thought a little bit about in the American context, but you've thought about it in the global context, and that's the issue of debt.
Types of Debt Explained
00:01:13
Speaker
You wrote an article recently called Whole World Debt Crisis, and in it you describe rising public household and corporate debts over the past 50 years as a percentage of GDP. So you showed that global government debt is now about the same size as global GDP, same thing for private non-financial debt.
00:01:32
Speaker
and you've showed that household debt is about 60% of GDP. You also showed a chart that was pretty alarming that suggested that the number of low-income countries that are considered to be in or at risk of debt distress has been rising and nearly 60% of low-income countries are classified as being either in debt distress or having high risk of debt distress.
00:01:53
Speaker
So let's unpack this a little bit. First of all, can you describe what's included in government debt, household debt and non-financial corporate debt? Like what is that?
00:02:04
Speaker
Yeah, sure. Thank you very much for the question. So government debt, otherwise known as sovereign debt, these are debts incurred by governments to cover their expenditures. Just like with an individual or I'm a household, when your revenues are less than your expenditures, you incur debts and governments do this also. Every government in the world incurs debt. It's a regular feature of operating a government.
00:02:31
Speaker
And what's that issue for me in this context is just how large those debts have become and how quickly they're growing. So government debts, I mean, could be incurred for spending on pretty much anything from health care to education to subsidies for power or agriculture or any of the many number of things that governments spend money on defense spending and so on.
00:02:52
Speaker
In the case of household debt, the figures that are typically calculated nationally in the US and globally involve things like credit card debt, mortgage debt, home equity lines of credit, retail credit cards, like the card you might get from Nordstrom's, student loan debt, among other big categories of household debt.
00:03:16
Speaker
In the corporate context, the figures I quote in the article are non-financial corporate debts, and they are incurred either as loans or as bonds that corporations issue on the open market to raise funding for their operations. And in a corporate context, depending on what business that corporation is in, they might be using those funds to pay for any number of things, from employee wages to materials and so on.
00:03:42
Speaker
Great. And just really quickly to clarify, what would be financial corporate debt? Financial corporate debt are debts incurred by banks or other financial institutions. And most figures go separately. And that's not something that I'm dealing with here in this article, though I think debts incurred by financial institutions are a pretty fascinating area of research also.
Debt Jargon and Democracy
00:04:04
Speaker
Just wasn't part of this particular study of mine.
00:04:06
Speaker
Yeah, sure, sure. No, that's great. One of the things about debt, maybe compared to some of the political cultural issues is there's a lot of jargon, a lot of concepts. So it's trying to make it, break it down as much as I can for our listeners. And Matt, on that point, I'm really pleased you pointed this out about the jargon and technical language that surrounds issues like debt. This is a real kind of chip on my shoulder as an academic and a researcher, because these issues fundamentally are not all that complicated.
00:04:34
Speaker
I mean, and we can talk about them in simple terms. But what, what dismayes me is the way in which technical language is often deployed by politicians, by the financial presses, by financial institutions themselves.
00:04:47
Speaker
Almost as an exclusionary mechanism, it prohibits the general public from participating in these conversations about finance.
Debt: Burden and Development
00:04:56
Speaker
And for me, it's one of the most undemocratic aspects of scholarship and public debate about finance, that it occurs in such jargon-filled and complicated terms
00:05:07
Speaker
the average person who understands quite well what debts are and how they come about and problems with debts are somehow excluded from a conversation that they should be part of. Yeah, that's a great point. Now, the flip side of that coin, I think, is that sometimes conversations about conceptually complex topics in public can be dumbed down and oversimplified too much, and especially in the polarized discourse. So, for example, with debt, you often hear messages that basically sound like debt bad, right?
00:05:37
Speaker
So before we get into why you see debt as a huge problem for today's economy, let's quickly note that debt isn't always bad, conceptually, generally, and in fact can be essential for development.
Good Debt vs. Bad Debt
00:05:50
Speaker
So for example, whether you're a person, you're a business, or you're a country, access to credit unlocks important pathways to building wealth and capital. So imagine how hard it would be for an average person to own a house if you didn't have mortgages.
00:06:03
Speaker
Imagine how inaccessible college would be to many americans if you didn't have student loans and companies and countries of the same dynamic what is small businesses start out with small business loans countries use debt to build infrastructure that. Provide benefits for decades they use debt to soften the blow of a recession etc etc.
00:06:20
Speaker
I think that's a critical point to make. I mean, even looking at me, I mean, I've incurred student debts in order to obtain a PhD and an investment in my future. And a lot of what makes the difference between a good debt, quote unquote, and a bad debt is what future advantages you're purchasing with that investment. And if you're able to pay off those debts and still have more,
00:06:42
Speaker
then you would have without incurring those debts. And so yes, it's been a critical development tool for poor and middle income countries, for individuals. Mortgage debt is one of the most important categories of debt because it's an avenue for wealth accumulation, for working in middle class people. So I couldn't agree more.
Symptoms of Excessive Debt
00:07:00
Speaker
What concerns me currently is how quickly debts have grown relative to our collective ability to pay them off.
00:07:06
Speaker
And that's, I think, one of the pivot points where you start thinking about debts not being so good and starting to be a burden rather than a benefit. So let's talk a little bit more about that. So some of the symptoms of having too much debt, whether you're a household, a business or a government.
00:07:22
Speaker
Your interest payments can become crippling. It can become hard to secure financing for new investments. Governments have, unlike households and businesses, have the option in theory of printing money to pay off their debt, but that can cause inflation with, you know, Weimar Germany in the twenties and Venezuela in the past decade, providing tragic examples. So my question to you is how do we know when a country business or household has too much debt?
Liquidity vs. Insolvency
00:07:46
Speaker
What does that look like?
00:07:47
Speaker
Well, it's a good question and it really varies on a case by case basis. I mean, I think one distinction, first of all, is that there's a difference between debt problems associated with temporary liquidity problems, temporary shortfalls in cash, which is called liquidity problem.
00:08:04
Speaker
versus a solven insolvency problem, which means that no matter what you did and no matter what your cash flow looked like, you just fundamentally structurally do not earn enough money to ever pay back these debts. Can you give a prototypical example of each of those just to give people a clearer picture of what you're talking about?
00:08:22
Speaker
Yes, absolutely. Let's say that my credit card bill is due on the 15th and I owe a payment to the bank that holds my credit card, but my paycheck doesn't come for a week after that payment is due to the credit card company. That's a liquidity problem. My paycheck is more than enough to pay for that, to service my credit card, to make that monthly payment or even pay off the whole statement balance.
00:08:46
Speaker
I just don't have it in my hands at the right time that I need to make that payment on time. And so that's really an issue of managing cash flows and ensuring that you can meet monthly deadlines with money that you have. But it's a way of managing cash flow. By contrast, if I accumulated, let's call it $50,000 in debt, my income isn't sufficient to pay that off.
00:09:12
Speaker
And so no matter how I managed my cash flow, no matter how I saved in February to be able to pay off my bill in March, I would never have any hope of having enough money to be able to pay it off in full.
Government Solutions for Debt Issues
00:09:23
Speaker
And this happens to governments all the time. Sometimes governments experience liquidity shortfalls. They're just short on cash for a short amount of time. And they can borrow internationally or engage in other kinds of relationships with banks or with bilateral creditors, other governments to help them
00:09:39
Speaker
deal with that time mismatch and when their payments are due. A problem of insolvency indicates that the debts are just unsustainable, that they just will never be paid off. And in that context, we often see governments working with their creditors to restructure those debts, to either reduce them in size
00:09:58
Speaker
to expand the period over which payment can be made, the term of the loan or the debt, among other workouts that can help reduce the absolute burden of that debt on the debtor.
Interest Rates and Debt Management
00:10:11
Speaker
That distinction is really interesting. And one of the things that strikes me as important to which side of that line you fall on or how much more broadly, how much a particular size of debt is burdensome is the interest rate. So for example, you said that if you had 50K of debt, that might make you insolvent. I assume you were talking about credit card debt because of course,
00:10:33
Speaker
Most people who have mortgages have much, much more than 50K of mortgage debt or the difference of being the interest rate, 50% or $50,000 in credit card debt with a 20% interest rate would be an enormous monthly payment. In contrast to, you know, you could have 10 times that in mortgage debt with a 3 or 4% interest rate and with a much more manageable payment. Absolutely right. And also the term of the loan, right? I mean, you might have 30 years, right, to pay off a mortgage, 30 years to grow your income and your capability to repay.
00:11:02
Speaker
as opposed to a revolving line of credit in which you might need to make larger payments more frequently.
00:11:08
Speaker
Okay, so let's talk about, you know, before the crisis happens. So once the crisis happens, you know, you can restructure, you can go bankrupt, right, or something like that. You can print money and hope that doesn't cause an inflation calamity. There is no international bankruptcy provision. So while individuals or corporations can certainly declare bankruptcy at the global level, it looks a little more disjointed and a little less orderly in terms of how defaults are managed. You know, governments don't really
00:11:37
Speaker
They don't get declared bankrupt. I know we say that in popular discussion that, oh, the Federal Reserve is broke. The Federal Reserve is
Economic Growth and Debt
00:11:44
Speaker
bankrupt. Sure, sure. As a legal concept, there's no such thing. Right. Of course, yeah, there's no international bankruptcy court. But let's talk about the path there.
00:11:53
Speaker
So one of the differences, interest rates is a big difference potentially between rich and poor countries. And this is actually connected to how I got interested in this issue in the US. So one of the things that I'm interested in and that I study is slowing economic growth, which has been occurring in rich countries for several decades and some people think is inevitably going to continue.
00:12:15
Speaker
That obviously has implications for debt because basically there are two ways to lower your debt to GDP ratio.
Pandemic Impact on Debt
00:12:21
Speaker
You can pay down your debt or you can increase your GDP and most countries rely on the growth mechanism to reduce their debt burdens, which means that long run stagnation tends to cause rising debt to GDP ratios. We've already seen this in places like Italy and Japan. This is arguably what we're seeing in the US, at least in part.
00:12:37
Speaker
So I just want to say like, so when the pandemic hit, this was a huge factor in increasing debt to GDP ratios. So the pandemic hits and yes, debts were increasing, but those figures really changed because GDP like just shrunk all over the world, right? Economy stopped. And so part of what's going on is not just an increase in debt, as you mentioned, but the stagnation more recently associated with the pandemic, but in longer term also for many developed
G7 Countries' Debt Strategies
00:13:03
Speaker
countries.
00:13:03
Speaker
So one of the things I wanted to get your thoughts on is there's been a really interesting conversation about the implications of this for debt in the U.S. context and in the context of G7 countries, so basically rich countries. I'd love to get your thoughts on how this applies or doesn't apply to poorer countries.
00:13:18
Speaker
So there was a paper in 2020 by Jason Furman and Larry Summers, two huge names in macroeconomics, and there was a paper in 2019 that made a similar argument by Olivier Blanchard, who's also a huge name in economics, and I think at one point was a cheap economist of the IMF, and at the time he wrote the paper was the head of the American Economic Association.
00:13:38
Speaker
They pointed out that as growth slows down, which causes debt to GDP to go up, interest rates, including on government debt, tend to also go down for a variety of reasons, but reasons that are connected. The opportunity cost basically of lending cheaper goes down is maybe a simple way to explain some of the reasons. Plus, of course, central banks tend to lower their interest rates, which has affected the market, et cetera.
00:14:06
Speaker
And so they said, you know, what really determines your burden of debt is not the ratio necessarily of your debt to GDP, which they call a stock, it's more the flow. So it's, you know, your interest payments is a percentage of GDP, for example, and there are some other more complicated measures that they argue for.
Alternative Debt Burden Measures
00:14:25
Speaker
One of the things that's really interesting that they pointed out is that in the G7 countries, even as debt to GDP has gone up for the most part for the last 20 years, interest payments as a percentage of GDP by governments has gone down in most G7 countries in the last 20 years because interest rates have gone down.
00:14:42
Speaker
And so in 2020 and in 2019, the conclusion that they reached was even though our debt to GDP is going up and we have a pretty sizable deficit, there's room, there's fiscal space, as they said, or room for more deficit spending. Now, of course, that was 2020. Summers later warned that the American Rescue Plan was too big and would cause inflation and he turned, he was right. Furman, I believe, has warned recently about structural deficits being too high. There's an ongoing debate about how much is too much.
00:15:12
Speaker
But I wanted to get your thoughts on how to what extent does this debate parallel or not parallel the issue in low income countries?
Challenges for Low-Income Countries
00:15:19
Speaker
Because as I'm not an expert on on that context, but as I understand it, the access to credit and the interest rate problems can be a lot bigger. I'd love to hear your thoughts on that. Yeah, thank you. And I think that the summer's argument is really interesting because that kind of avoids the conversation about, well, why were interest rates so low?
00:15:41
Speaker
So, I mean, after the 2008 recession, major governments and central banks across the world lowered rates to help revive the financial system in the economy. And rates were at historic lows for close to 15 years, you know, leading into COVID. And all L-SQL lower rates encourage, you know, entities to take on more debt. And so part of the story of these rising debts is a very long period of low interest rates.
00:16:09
Speaker
that reduced the opportunity cost of borrowing to use your language. These low interest rates were achieved by central banks by massive injections of liquidity into global financial markets. The US Federal Reserve, for example, purchased huge amounts of assets off of financial markets from stocks and mortgage-backed securities to its own bonds.
Role of Currency in Debt Management
00:16:34
Speaker
using printed money to purchase them, injecting that money into the global financial system, such that the world was really just a wash in cheap money. And so why not borrow? This isn't unlike the situation in the 1970s when high oil prices encouraged petrodollar recycling.
00:16:52
Speaker
Huge numbers of developing countries took on massive debts because the world was just awash in liquidity There was a lot of money to lend and banks like to make a profit and you know bond on the traders like to make a profit and so they did so and I think what complicates the matter even Further for many poorer countries is the issue of the currency in which their debts are denominated
00:17:15
Speaker
for the US government or the European governments, they tend to be borrowing in their own domestic currency, right? The US borrows in dollars, EU countries borrow in euros. And so what's eliminated in that equation is exchange rate risk associated with the debt.
US Impact on Global Debt
00:17:33
Speaker
Yes, there is interest rate risk. When interest rates rise, the burden of debt service also rises. And as you were saying, debt service as a percentage of GDP climbs, as interest rate climbs,
00:17:44
Speaker
making the debt more burdensome. But there's an additional burden for countries that are borrowing in foreign currencies. Most global investors aren't interested in borrowing and lending in weak local currencies, the currencies issued by poorer countries. Some of those currencies are not only weak, but they're not convertible, meaning it's difficult to turn the local currency into a hard currency like a dollar or a euro. But so concretely,
00:18:11
Speaker
When US interest rates rise, this has the effect of increasing the strength of the dollar, the value of the US dollar. Now, if you are a lower income country and you've borrowed in dollars to support your own economy, then the cost of your debt goes through the roof when the dollar appreciates relative to your local currency.
00:18:34
Speaker
You need more and more and more local currency units to make the same dollar debt payments, debt service payments that you used to. And so for many developing countries these days, rising interest rates are compounded and the issue is made even worse by the currency mismatch of their debts.
00:18:55
Speaker
Yeah, isn't there a flip side of that too, or a second aspect of that? So one of the things that Olivier Blanchard points out is that the nominal growth rate in the US, so basically, roughly speaking, growth plus inflation, has almost always been larger than the average interest rate on government debts, basically.
00:19:17
Speaker
So in a sense, inflation as a negative consequence of having fiscal or monetary policy that's too loose can also lower burden of debt if you're the US. Doesn't it do the opposite for countries that are borrowing in foreign currency? Yeah. I mean, and this is the common complaint about US dollar dominance and the power of the Federal Reserve in the global economy, that the US is able to export its inflation problems abroad.
00:19:46
Speaker
as a consequence of its central role globally. So the US hikes interest rates to manage inflation at home, and what happens abroad? Currencies collapse relative to the dollar, which increases the price of imports into developing countries. So they're paying more for food, which is denominated in dollars, for energy, which tends to be denominated in dollars, energy trade globally.
00:20:10
Speaker
And so as the US Federal Reserve tries to manage inflation domestically, it has a negative impact and sends that inflation to other countries via the foreign exchange relationships between the dollar and their local currency. And so there's a lot of discontent around the world these days, especially over the last couple of years as the US rose rates going into the Ukraine war in early 2022.
Currency Dominance: Zero-Sum Game?
00:20:37
Speaker
And countries are frustrated
00:20:39
Speaker
at how U.S. monetary policy impacts their own well-being on the other side of the world, their own capacity to buy food, buy energy, service their debts, pay for other things that governments, that we expect them to pay for, like health care, infrastructure, education, and so on. So really quick follow-up question, and then I want to go back to the 70s for a second.
00:20:59
Speaker
Really quick follow-up question. Is the foreign currency of choice fundamentally a zero-sum game? So the United States benefits from having its currency being the dominant currency in global financial markets? If some other country supplanted
00:21:16
Speaker
that or if somehow it became more democratized which to me seems unlikely just due to financial incentives for stability. We can talk about that if you'd like. I have a piece of money about that. Let's talk about that. Is it a zero sum game? Are we going to end up borrowing and lending disproportionately in some countries currencies compared to others and that's going to benefit those countries at the expense of others or is there a way to have a different system where everybody wins?
00:21:44
Speaker
It's a great question. I think that's the debate that's playing out internationally right now. From the perspective of up and coming and new powers, rivals to the United States on the international stage, China, India, Brazil, Russia, South Africa, those are the BRICS countries, and there's others besides. There is an increasing sense that the US's financial dominance comes at the expense of the economic wellbeing of other countries that are
00:22:13
Speaker
quote, forced to use the dollar. So from the perspective of BRICS and other countries around the world, I see that language, that zero sum game language, right? That your dominance comes at our expense, that you are reaping benefits from dollar hegemony and pushing the costs onto other countries around the world. And it's galvanized, I mean, what I think of as an international movement to push back against dollar dominance.
00:22:39
Speaker
and countries all over the world, and I can detail this for you, are innovating and trying to develop workarounds to reduce their dependence on the U.S. dollar for precisely the reasons you're suggesting.
Global Currency Dynamics
00:22:50
Speaker
However, most U.S. economists don't necessarily agree with that, which is, you know, perhaps not surprising. Which part of the argument? What's the argument there? The argument there, I mean, I think the classic sort of liberal economic argument that a rising tide lifts all boats that fundamentally stable
00:23:08
Speaker
international financial system, one that's anchored by a currency of overwhelming strength and value relative to other currencies, provides a mechanism for broader global stability and wider and deeper financial markets. So the argument I often see coming from the West is that this is really good for everybody.
00:23:29
Speaker
And the classic historical reference point is, well, look what happened during the Great Depression when we didn't have a single stable currency. And look at how the international financial system devolved into competition and de-growth and so on. And let's avoid that. That was the whole idea behind dollar supremacy, to avoid what happened during the Great Depression. Now, the dollar wasn't the only difference between those two bank crises. But let me ask you a follow-up question.
00:23:54
Speaker
Are those arguments really mutually exclusive right like couldn't it be the case that having a common currency or a dominant currency is beneficial on average to the size of the global economy and to the stability of the global economy and also,
00:24:11
Speaker
it can be very harmful to individual countries, especially developing countries with currencies that are not widely traded or trusted. And then also that it's worse, even if the overall economy is better, it's worse compared to a counterfactual scenario where we have an equally stable global economy, but the dominant currency is China's or India's from the perspective of China or India.
00:24:35
Speaker
It's a great question. Personally, I'm more inclined to think about it historically. Over the course of the 20th century, if you look at international monetary history, there have been periods of time where the world has eagerly adopted a single hegemonic currency.
Historical Currency Shifts
00:24:51
Speaker
because it is beneficial to have the stable anchor for the international financial system. And then there are other periods that show up over the course of the 20th century where that was not the perception among governments of the world, where the so-called hegemonic currency was perceived as being weak or losing value or as somehow unstable. And countries, much like any other investor, started to diversify their foreign currency holdings, their foreign exchange holdings, the currencies in which they conducted trade.
00:25:20
Speaker
as a way to hedge against the risks associated with relying on a hegemonic currency. So for example, between the British pound sterling was the hegemonic currency leading into World War I, but the United States dollar didn't emerge as a hegemonic currency really until the late 1950s. The groundwork had been set previously. So there's this huge chunk of time roughly with
00:25:42
Speaker
the two world worlds in the Great Depression between them and even the early Cold War, where there was no single hegemonic currency and countries held a basket of different kinds of currencies in different proportions, right? Based on their perceived risks and benefits of holding those allocations. So Barry Eichingreen is a really fascinating historian on this and he has a lot of really interesting time series data tracking currency holdings over time.
00:26:09
Speaker
And what you see is really not, it's not like there's always one single dominant currency.
BRICS and De-Dollarization Efforts
00:26:14
Speaker
You see periods in which that prevails and then periods in which the monetary system appears. I wouldn't use the word democratic so much as multipolar, meaning that there are several dominant currencies that are being widely used at any given time.
00:26:29
Speaker
It's my own opinion that we're heading into one of those periods now, but that's just my opinion. Okay, so I have two follow up questions about that. Sure. The first is, and I know far less about this area of economics than you do, but my hypothesis would be that the BRICS effort to replace the US dollar or lessen the importance of the US dollar as a global currency, my hypothesis would be in the short term, it's likely to fail.
00:26:56
Speaker
for political reasons. Meaning that one of the things that makes the US dollar trustworthy in addition to the size and power of the US economy is the rule of law, the democracy, the financial freedoms that individuals and businesses have in the US. Related to all those things, freedom from expropriation, freedom or less risk of currency manipulation, less risk of
00:27:25
Speaker
you know, state failure, et cetera, et cetera. Not that there's a huge risk of state failure necessarily in the BRICS countries either, at least some of them. So am I wrong? What's your hypothesis?
00:27:34
Speaker
So a couple of things, just a few facts. So first of all, I mean, I think de-dollarization is ongoing. I don't think it's like some future battle that maybe won or lost. How do we measure that? The peak of dollar dominance was in 1968. That was the time at which the dollar was most widely held as a foreign exchange reserve. And it's only been declining since that time. So that's very interesting.
00:27:56
Speaker
We also see over that period from 1968 forward, the rise and fall of the Deutsche mark, the rise and fall of the yen as a major global currency. We see the rise of the euro, which still maintains a rather large chunk of international trade and lending, something like I think maybe 20% of international lending in the euro, but don't quote me on that. So I think we've already seen the dollar lose ground to competitors since the late 1960s. And so what I keep thinking about is more of a continuation of an existing trend.
US Financial Dominance and Challenges
00:28:26
Speaker
So the data is really interesting on this. So the dollar is no less than half of world trade now occurs in the dollar, although the dollar is used to trade some of the most critical commodities and was widely traded global commodities like oil. That's a really important one. And the dollar still dominates in that context.
00:28:44
Speaker
But for example, non-Western governments have actually been reacting very strongly to what I see as a breakdown in the rule of law in the United States in regard to its financial system. I was really glad that you mentioned the risk of expropriation in the context of the rule of law in the United States. And I agree that historically, that kind of law and order made investors all over the world comfortable.
00:29:07
Speaker
holding dollars, comfortable investing in U.S. assets, comfortable holding U.S. government debt. But the picture changed really dramatically with the onset of the Ukraine War in February and March 2022. The United States, one of its end in the EU, worked together to sanction Russia. But one of the biggest early moves that the United States made to penalize Russia for its involvement in Ukraine was to kick Russia out of the SWIFT system. That's the system for worldwide
00:29:37
Speaker
Oh my gosh, interbank transfers, gosh. Yeah, something like that. It's the organization that facilitates dollar payments. So when entities all over the world are trading in dollars, this is the middleman, the middleman organization that sits between and facilitates those trades. And Russia was excluded from it. Russia's central bank assets held in Western banks, US and European Canadian banks were frozen. And there's been increasing talk from the US and Europe since last fall about seizing
00:30:05
Speaker
Russian assets to redistribute to Ukraine for war reconstruction and so this this rule of law and stability of the US system has lost ground has a lot has seen has lost legitimacy in the eyes of parts of the world I mean I like this there's a quote from the Indonesian president who was like yeah look we need to start working on trading
00:30:28
Speaker
in non-dollar currencies because of the geopolitical risk associated with using the dollar. China is the world's largest trading partner for most countries. Most countries, their largest trading partner is China. And so the logic was, well, if the US can do this to Russia and the Europe can do this to Russia in a geopolitical context to a country perceived as an enemy, what happens when the US and Europe go to war with China and they try to sanction and freeze assets of countries trading with
De-Dollarization Post-Ukraine War
00:30:56
Speaker
China?
00:30:56
Speaker
which is a much much bigger threat right given china's predominance in the international system and so there has been concerted moves over the last 18 months to reduce dependence on the dollar as a way of avoiding future sanction and asset seizure by us and european governments should a war with china break out so for example
00:31:17
Speaker
Saudi Arabia and China have just been dumping US government debt. Their holdings of US Treasury are at their lowest in 15 years. Governments in Asia especially, including China, India, and Singapore have been massively stockpiling gold, and not just stockpiling gold, but repatriating gold holdings from vaults in the West. They don't want to own gold that's held in a vault in England or held in a vault in the US. They want it at home.
00:31:45
Speaker
to avoid future risk of seizure and expropriation. So I think we're at a time now where the historic stability and reliability of the United States government and US dollars increasingly in question.
00:31:59
Speaker
And I'm seeing, and my research shows, really expedited movements by other countries to work together to reduce dependence on the dollar. So for example, on the Association of Southeast Asian Nations, Indonesia and Singapore just enrolled a QR code-based local currency trading system where they will be facilitating trade in local currencies, fast, secure trade in
00:32:23
Speaker
you know, Singapore's currency and Indonesia's currency, not using the dollar at all anymore, eventually, using new technologies like QR code.
00:32:32
Speaker
So it's fascinating. I mean, we see Russia, for example, adopting cryptocurrency-based systems for international payment as a way of circumventing U.S. and European sanctions. And so I think the position of the U.S. government and the U.S. dollar is more tenuous than it was in the past. And not just because of the Ukraine war. I can bring us back to debt. U.S. government debts have the world concerned. Just a couple of months ago, I was in June, Fitch downgraded.
00:33:01
Speaker
US government debt from AAA to AA. That was related, I thought, both to the debt ceiling brinksmanship in addition to, or possibly even more so than the quantity of debt, or was it both?
00:33:12
Speaker
If I may, I think the statement is pretty outstanding. It's very interesting. So this is from Fitch. In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit.
00:33:32
Speaker
The repeated debt limit political standoffs and last-minute resolutions have eroded confidence in fiscal management, and they go on. So the Fitch downgrade wasn't just reflecting the dispute, the recent dispute over the debt ceiling, but what they see to be as long, decades-long patterns of fiscal mismanagement and standoffs that have eroded the reputation of the US government as a debtor.
00:33:58
Speaker
Okay, let me ask you one follow-up question of what you were saying earlier. So we could have a whole podcast on the Ukraine war and the financial decisions that were made, which I'm sure were made not for financial reasons, right? But let me just ask you a clarifying question about what you were saying about the countries dumping US debt or US assets. To what extent, I always think in terms of trust, when you talk about countries, trust compared to whom?
00:34:26
Speaker
So do you see the pattern being that countries are saying or thinking, you know, some other large country like Russia or China is more trusted than the US because of, you know, what happened with Russian assets or is it more, you know, well, we thought that just the US and the EU could be trusted. Now we don't trust anybody. And so we want to bring it all back locally or in crypto or things like that.
00:34:47
Speaker
One sense is more of the latter. It's not that there's some new, more trustworthy replacement. There's two major theories for looking at currencies. One is this kind of cage match between super power currencies vying for total world domination. And it's the dollar versus the Chinese Yuan. And they're going head to head.
00:35:09
Speaker
That's not the theoretical perspective that I use in my own work. I see opportunities for, like I said, non-hegemonic currency systems, for multi-polar currency systems based in historical readings drawn from the interwar period and also in the post-1970s period. So what I see at least, and I see this in the crypto context, I see this in the gold context, that countries are diversifying
00:35:34
Speaker
their currency holding and currency usage as a response to uncertainty and fundamental uncertainty at that. So I don't know that there's a much more trustworthy substitute unless you want to look at gold as the classic safe haven asset in that context.
Developing Countries' Debt History
00:35:48
Speaker
But gold doesn't need a government to make it trustworthy, which is interesting.
00:35:51
Speaker
Getting back to the sustainability of debt, which is where we started, let's take your hypothesis, which you've laid out convincingly as a premise that the global debt market is going to diversify in terms of its currencies. What are the implications of that for a low-income country that's in debt distress? Does that help them at all? I'm so glad you asked this question because I need to just do a little bit of history.
00:36:22
Speaker
Starting in roughly the 1970s, developing countries took on huge amounts of debt during that decade associated with rising oil prices, which put money into the hands of Gulf region oil producers.
00:36:36
Speaker
who then invested that money into the United States. And then you had all of these US banks looking to lend that money that had gotten cycled through across the developing world. And so deaths just skyrocketed. And there was this 1980s debt crisis that we talked about. In 1981, the US started raising interest rates, not a dissimilar story to what we've seen recently.
00:36:56
Speaker
and these giant debt burdens suddenly became very unsustainable for the reasons you've eloquently pointed out. Rising interest rates matter in terms of your ability to repay. And so after this debt crisis in the 1980s was worked out largely vis-a-vis the International Monetary Fund and the World Bank. There were almost no other investors, no other governments, no other private investors were willing to keep lending to the 40 plus
00:37:24
Speaker
poorer countries who had just defaulted on their debts. And that's just reasonable. If you're going to default on them, I'm not going to lend more. Who was going to help keep these countries afloat while the World Bank and the International Monetary Fund step in? And for several decades, they were really the only show in town in terms of creditors. And whatever the IMF and the World Bank did, other bilateral creditors, other governments and other private investors would follow. So if the IMF made a loan to, let's call it,
00:37:52
Speaker
Argentina, then the private sector would come in and follow and say, well, if the IMF thinks it's safe and the IMF is working with this country, then it's probably safer for us too. And so the World Bank and the IMF really monopolized the credit market to a lot of middle income and lower income countries between the 1980s and let's call it the mid 2000s. But what's really interesting is that over the last 15 years, the kinds of creditors available
00:38:19
Speaker
for poor country debtors have diversified.
Rise of Alternative Creditors
00:38:23
Speaker
So China rose and started lending a lot more to developing countries. Some of those loans in Yuan, some in dollars. Private investors started lending a lot more. The percentage of developing country debt held by private bond holders has skyrocketed over the last 15 years. Even further, regional development banks and other kinds of competitors to the IMF in the world bank started rising up. Regional development banks in Asia, in Central America,
00:38:49
Speaker
the rise of what used to be called the BRICS bank, that's now called the New Development Bank, which is being operated by the BRICS country specifically to compete with the bank and the fund.
00:39:00
Speaker
The Asian infrastructure, an investment bank, which is spearheaded by China. In addition, there's the rise of new kinds of currencies like crypto. And so what I find fascinating is that debtor countries today seem to me to have more leverage in working out their debts, precisely because they have more options. There are more creditors willing to lend to them.
00:39:22
Speaker
So I think the case of El Salvador is really instructive in this regard. El Salvador was hugely in debt, was facing emergency kind of debt situation, and the IMF was stepping in to offer them a loan. And instead of taking an IMF loan, El Salvador
00:39:39
Speaker
borrowed some money from China, they borrowed some money from a regional Central American bank, and then they also introduced crypto, Bitcoin, as legal tender alongside the dollar to help try to stabilize the domestic economy. And what's fascinating is that it was successful.
00:39:56
Speaker
The IMF was predicting massive failure. Private investors were predicting massive failure. And yet, El Salvador managed to avoid a new IMF loan that would have had strict conditions and required them to make all sorts of difficult decisions, and instead pursued a series of other substitute options that ended up being successful. I'm seeing similar stuff in the case of Argentina, where Argentina has a huge amount of dollar-denominated debt, and they've been working with China to swap currencies. They do currency swaps with China.
00:40:26
Speaker
so that Argentina has a whole bunch of guan to work with that they can use for trade and to service their debts. And so, frankly, I'm a little more optimistic about developing country and the poorest country's debt situations now than I would have been 15 years ago, 20 years ago when I started studying this
Current Global Debt Crisis
00:40:45
Speaker
issue. Just the existence of more options and options and creditors competing against one another.
00:40:52
Speaker
to court these developing country governments, this means that better deals can be made for poorer countries. That's really interesting. And as you said, it's quite optimistic, more optimistic than you said you would have been 15 years ago. And yet only a few months ago, you wrote this article called the whole world debt crisis. So now let's get pessimistic. What does it look like when those chickens come home to roost in your thinking?
00:41:15
Speaker
This is a really good question. And one of the big open-ended questions for me with this research, and one of the reasons that I'm interested in what's going on with debt now, is that I can't think of a historical period where so many countries, in addition to world corporations and world households, have been in so much debt simultaneously. So there's this synchronicity to it. Everyone is in debt, in huge amounts of debt at the same time.
00:41:42
Speaker
What's further interesting, and the World Bank and the IMF have commented on this, that these recent interest rate increases that the United States took, other countries have followed suit. This is the most synchronous period of interest rate increases that we've seen in 50 years. The world is saturated in debt, and at the same time, central banks are all more or less raising interest rates.
00:42:06
Speaker
which raises the prospect of cascading and simultaneous defaults that a lot of different governments and a lot of different entities might simultaneously be finding themselves in debt trouble. And I find this interesting and concerning because one of the questions it raises for me is who is going to be the lender of last resort if the whole world is experiencing debt trouble at a similar time?
00:42:33
Speaker
So, for example, right now, the US is experiencing mounting debt troubles. The UK
00:42:39
Speaker
Germany, Japan, these are huge economies whose central banks have historically stepped in during times of global financial volatility to stabilize the situation. China is experiencing massive debt problems. Corporations who you might think might be able to provide some kind of private sector stability in the global debt context, dealing with debt restructuring, perhaps purchasing bonds,
00:43:05
Speaker
They're also in trouble. So one of the questions for me is who's going to bail everybody out? Where is that underlying support going to come from? Or are we going to see a cascade of defaults and a series of potential failures to stabilize? And I'm not sure what this is going to look like. At other periods, financial crises moved around over time and geographically.
00:43:30
Speaker
And so it wasn't the case that every part of the world was experiencing debt problems all at the same time. And this is, I think, a new wrinkle in debt crises. The United States has been in debt trouble before. Argentina has been in debt trouble before. Zambia has been in debt trouble before. Thailand's been in debt trouble before. But the fact that it's happening all together in a context of rising debts and rising interest rates is what's giving me pause about this particular episode that we're in now.
US Debt Solutions and Political Challenges
00:43:57
Speaker
So if President Biden called you to the White House and said, I've read your article really concerned about this and Janet Yellen, what should I do about it? What would you say?
00:44:08
Speaker
That's a great question. I don't think there's one special solution. The United States has a number of problems that are trickling into its debt problem. Not only is growth slowing, tax receipts are slowing, but spending is rising. I think this is going to have to be a combination of cuts in expenditures and attempts to boost tax revenues. I don't see how we get out of this situation without both cutting spending and raising tax.
00:44:38
Speaker
And the question is, what do we cut and whose taxes do we raise and how much? And that's what a lot of this debate in this country is about. I have my own personal opinions about what could be usefully cut, starting with our defense budget and grotesque amount of defense spending in this country. It's half the budget. Let's talk about that a little bit, because I think how do you reduce the deficit in the U.S. Does Democrats ever bring into this, right? It's always the one that the huge chunk of U.S. spending that nobody's going to touch.
00:45:07
Speaker
I think it's bigger than that. Sometimes it seems like the conservative solutions are we're going to cut spending, we're not going to touch social security, Medicare, the military, but we're going to balance the budget and don't worry the math will work out. And it's like, wait, are you going to cut more than half of everything else? Which obviously they're not. And sometimes they also want to cut taxes on top of that. And then on the left, they often want to raise spending and then their tax solutions are, we're going to tax millionaires and billionaires and there just aren't enough of them to generate that much revenue.
00:45:37
Speaker
You can do a wealth tax. Even the wealth tax isn't if you buy analyses like Elizabeth Warren's about how much money it would raise. It still doesn't make a big dent in the problem and also would be an accounting nightmare. Imagine a 2% wealth tax where somebody like Elon Musk says, if I have to make 2% of my wealth liquid, that sale would reduce my wealth and therefore reduce the tax that I owe. Just imagine how much fun the lawyers would have with that. My personal, I guess, pet solution for this problem
00:46:05
Speaker
is number one return on investment right so reducing waste and i think that the that's where i would focus on the military in the sense that you know i do worry even though you know we do spend a ton on our military compared to as a percentage GDP.
00:46:19
Speaker
and overall compared to most of their countries. All other countries. All other countries, yeah. And yet I worry that that's more important to global stability than we think. And yet on the flip side, I think it's the case that the military hasn't passed an audit in a really long time. They had some, it's like $600 billion or something in the most recent one that they couldn't account for.
00:46:38
Speaker
Also, you read stories about how China is building their navy way faster than we are, even though they're spending way less. Now, some of that has to do with labor costs, but some of it must have to do with waste. It's not just the military. There was a paper that came out recently that showed that the US construction total factor productivity has declined since 1950. There's lots of waste.
00:47:00
Speaker
And it seems like cutting waste is something that we can do on the spending side on the revenue side it seems obvious to me that or at least i haven't heard any argument for any better for anything else than for having a sales or value added tax.
00:47:16
Speaker
One of the criticisms that conservatives have sometimes raised in the US in response to the call for raising high income taxes is they say, look at Houser's law. The federal government revenue as a percentage of GDP has been pretty flat for 100 years, even though we've had a huge change in the top tax rate. But there's no Houser's law across countries. So if you look across the OECD, there's huge differences in government revenue as a percentage of GDP, and they pretty closely track the value added tax, which
00:47:43
Speaker
is strikes me as you know the most free market efficient way to raise government revenue because the distortion is a function of the tax rate and the revenue is the tax race rate times the tax base and so you want to have a larger tax base as possible.
00:47:56
Speaker
And also, you want to have a tax base that's hard to offshore, which is consumption certainly, at least many aspects of consumption are like that. I'm not going to go get my groceries in Mexico if you charge me a sales tax. Now, liberals don't like sales taxes sometimes because they're regressive. Poor people spend a larger fraction of their income on consumption. But if you're using the money to fund government services that are progressive, then that addresses that.
00:48:18
Speaker
Then, of course, auditing. There's a study that just came out that found that for every dollar the IRS spends on tax audits, especially in the super rich, they make $6 in revenue. It's sort of tax the rich to become audit the rich. What am I missing? I appreciate this conversation. I think that there's a lot of good ideas for how to balance it, but I keep coming back to the practical reality of the US political system right now.
00:48:41
Speaker
I don't know that any kind of orderly workout of our debt problems is in our future. I mean, have you been tracking at all the government shutdown kind of back and forth? I mean, we are really- A little bit. Being in an institute that's largely funded by the federal government. I mean, a hyper partisan and polarized government right now. And I just, I don't foresee an orderly policy discussion in which we each give ground and come up with some really efficient and wonderful compromise.
00:49:11
Speaker
I just, that just does not seem to be in the cards for the US right now. My fear is of a more disorderly workout, of a potential default, a failure to make a debt service payment, some kind of banking system failure that results in capital flight out of the United States.
00:49:28
Speaker
So when debt crises happen across the world, typically there's a crisis first and then there's a workout. Often things get really, really bad before politicians are willing to come to the table and negotiate with their creditors and with one another about a workout. I am really pessimistic about our opportunities in the current Congress, given our current presidential and congressional makeup, for them to come to any kind of
00:49:53
Speaker
reasonable and sensible agreement in the time we have to work on this. So I'm also concerned by our dysfunction, but let me steel man the optimistic case there. Yeah, please. And the optimistic case would be more a case for a trend than a state, right? There's certainly lots of division, lots of polarization, lots of dysfunction.
00:50:11
Speaker
If you look at the most recent debt ceiling deal, it was a lot, you could argue it was a lot less disorderly than previous ones have been. But it didn't actually work anything out. They just raised the ceiling. There's no ceiling until 2025. So that's fair in terms of the structural debt issues, but just in terms of the political brinksmanship, right? There was much, it seemed like the risk that the US was actually going to default on its debt because of the debt ceiling law.
00:50:41
Speaker
seem to be lower this time than even in some previous times. There have been some, not related to debt, but there have been some bipartisan legislative successes in other areas, so the Chips and Science Act, bipartisan infrastructure law being two examples. My sense is that the engine driving some of those successes behind the scenes
00:51:02
Speaker
is that there's a growing and almost critical and sometimes critical maybe mass of moderates on both sides of the aisle that are willing and at least in theory least credibly to buck their side to avoid a disaster right so like kevin mccarthy has a narrow majority in the house.
00:51:22
Speaker
And so to pass anything on party lines, he needs to have his far right flank in line. But it seems more likely than maybe at least to me than maybe it was, you know, 10 years ago, that if it was required to avert a near term disaster,
00:51:37
Speaker
I think you know you can argue that the debt crisis is a slow-moving disaster that won't get averted but it's something like you know we're not working on default cuz we can't raise the debt ceiling it seems more likely than a few years ago to me at least that the adults on both sides of the aisle you know will be able to figure it out do you see a similar trend or my being a naive Pollyanna.
00:51:56
Speaker
No, I would never call you that, but I don't really see adults within like a million miles of the situation. I mean, I agree that it's great that they got together to avoid a short-term default, but they did it by making the problem much worse. How so? Because some would argue that they did so without eliminating some of the big legislative successes on things like infrastructure and climate change.
00:52:18
Speaker
They made no hard decisions about taxes and expenditures. They made no hard decisions. They kicked the can to 2025. They said, oh, let's just spend like crazy until 2025 and we'll revisit it then. So what the debt ceiling deal did was say there's effectively no debt ceiling until 2025. Spend away, borrow away. Yes, we averted near-term default, but with a solution that exactly spells out Fitch's concerns.
00:52:43
Speaker
decades of fiscal mismanagement. I don't think the solution to debt problems is more debt, and that's how I see it filing onto this.
Historical Debt Approaches and Consequences
00:52:51
Speaker
Let's go back 15 years, another steel man to your argument. I think it was 2006, you can correct me if I have the year wrong, but somewhere around there, there was this thing called the Simpson-Bowles Commission, which was I think a bipartisan commission to try to come up with solutions to precisely this slow moving problem.
00:53:09
Speaker
And one of the solutions, you know, not surprisingly was, or maybe the main solution was to cut the, we need to cut the deficit. Then the financial crisis happened. There were also around the same time, you know, there's a famous paper by Kenneth Rogoff and Carmen Reinhardt that argued that, you know, you shouldn't exceed 90% debt to GDP. And so there was lots of calls for austerity that came out of that. There was austerity that was required as, and sometimes deep austerity as a requirement for some of
00:53:36
Speaker
of restructuring and loans in places like Greece. The short-term economic evidence seems convincing to me against that advice being the right advice in the aftermath of the Great Recession. There's this famous paper by Olivier Blanchard and Lee that shows that countries that projected a fiscal expansion, I think in 2009,
00:53:59
Speaker
grew faster in the next two or three years than they had expected, and countries that projected a fiscal contraction grow slower than they expected. And of course, that, as you talked about earlier, can exacerbate debt problems.
00:54:12
Speaker
You know, in the long term, I think your argument is very clear, right? That our debt to GDP is going up, our growth is slowing down, so maybe that means that our debt is more important to get under control. But how do we think about it in the short term when there may be and probably will be times in the near to medium term where we want to increase our deficit?
00:54:31
Speaker
So for me, I mean, a lot of the way I think about this is the redistributive consequences of different kinds of debt workouts. One of my biggest concerns, so I strongly feel that in the United States, we've been living beyond our means as a nation for a long time. And that this post-Great Recession expansion that you were just alluding to, the post-2009 was almost entirely debt financed. That it's almost a false expansion in that way. It was funded by governments. It was a government-funded expansion.
00:55:00
Speaker
And so one of my biggest concerns with a more disorderly debt workout, which is what I see going on, is the distributional consequences that we will start cutting services and government programs upon which poor and working people rely.
00:55:16
Speaker
and not doing what we need to do to address wealth inequality on the other end. For example, I can't believe that we're still bailing out banks as one way to talk about the interaction between debt and solutions. We've spent half a trillion dollars. Let's stop there a second.
00:55:35
Speaker
What would you say to the architects of that bailout, as I understand it, did so very reluctantly and did so because they thought that it was necessary, as ugly as it was, to avoid a repeat of the Great Depression? Is that wrong in your view?
00:55:51
Speaker
What I would have preferred to see is to let the financial institutions fail and to use the money we spent bailing out big banks to cushion the impact of that crisis on households. I don't think Bank of America and AIG and JPMorgan Chase should have received a penny of taxpayer money as a bailout in the wake of the Great Recession. Because I think it caused a collapse and I'd like to see it funneled towards households.
00:56:14
Speaker
to support current consumption, to support mortgage payments, and so on. Again, just to push on this point a little more, I think the argument, because I've read a lot and seen lots of documentaries on this, and so I feel like I understand at least what the public version of the folks thinking was. It was that if you allow the bank, the banking system is so interconnected,
00:56:33
Speaker
that if you allow the whole thing to collapse like a bunch of dominoes, then the crisis of access to capital and confidence and credit that that would create would have such a big effect on the economy that you'd have to spend way, way, way, way, way, way, way more government money to dig out of it, and it would take longer, again, compared to 2008 as occurred in the Great Depression. Do you disagree with that?
00:56:58
Speaker
I think that some of that bailout money was spent indiscriminately. I think banks that made bad decisions and that put their money into risky investments that they shouldn't have, shouldn't have received a dime of taxpayer funds. I'm glad you raised that because that's a nuance that again, as I've seen addressed in at least one documentary, and I love to get your take on calculated risks, indiscriminate part, right? So the argument, as far as I understand it, the theory that Hank Paulson and Tim Geithner
00:57:23
Speaker
and other members of the administration had in terms of giving TARP money to both banks that needed it immediately and banks like JP Morgan that probably didn't, was that if they didn't do it indiscriminately, then any bank that was seen to be taking a bailout would then have a catastrophic loss of confidence in a bank run because it would be a signal to the market that they needed the bailout. It would undermine the bailout itself. Do you buy that argument? If not, what would you have done differently?
00:57:53
Speaker
So I'm sensitive to that issue and I know that that issue happens in a lot of places. We've been seeing it over the last couple of years also. Banks reluctant to take advantage of federal borrowing facilities, right? Like the discount window during the current banking crisis because of fear of like the stigma, right? That they're insolvent. But I think that the way we did it indiscriminately has fostered concentration, right? Has fostered banking sector concentration. So we indiscriminately lend
00:58:19
Speaker
Companies that don't need the money get it. In addition to companies that do, the companies that we're more stable to start with have additional funds, buy out the failing banks. I mean, every time we have a crisis and we bail out indiscriminately, we end up with fewer institutions on the other side. It gets increasingly concentrated. I mean, I joke with some of my students that pretty soon we'll have one bank to rule them all and one bank to find them.
00:58:42
Speaker
One bank to bring them all and in the darkness bind them, right? That we're going towards this kind of mega monopolistic banking system. I would have preferred to see, for example, support for community banks and regional banks and other kinds of smaller lenders and not providing larger lenders. I mean, if we're going to blanket and talk about indiscriminate lending, let's do it on a way that's smart and that supports decentralization, supports community growth. Let's not pile money into JP Morgan and Goldman Sachs.
00:59:11
Speaker
you know, talk about community level banking and decentralizing our banking system. I mean, I think it would be a good idea for us to start thinking about longer term goals and not just like in the short term saving, let's save the banking system and prevent contagion. The contagion happened anyway. Life was miserable for families anyway. I don't know what these bailouts did for normal families who were underwater on their mortgages. I mean, we saw massive increases in poverty, massive increases in hunger, increases in homelessness, increases in housing insecurity of all kinds,
00:59:41
Speaker
associated with the great recession so yeah we bailed out those banks but I don't see much evidence in the data I've looked at that it was super helpful for the average American struggling to put food on the table for their families I mean I think if we're so part of this question is who gets the money's first right whose pocket does it go into to start with.
Conclusion and Advice
01:00:00
Speaker
Right. And not just about the size of the bailout. And also what are the multipliers? Right. I think is a huge issue in the liquidity crisis. But we could have a whole podcast on the bailout. We're almost at a time. So as a parting thought, what would be a piece of advice you would give consumers that are worried about this problem? Because, of course, the debt problem, as we talked at the beginning, is not just a government debt problem. And what is one policy that you would prioritize if you were a policymaker?
01:00:29
Speaker
Those are really good questions. Gosh, I'm reluctant to give financial advice to debtors of any kind, but in terms of poor country debtors, borrowing in other countries' currencies is a horrible idea.
01:00:42
Speaker
It would be a really good idea to develop ways of borrowing and lending that expose poor governments to less foreign exchange risk. And even diversifying the currencies within which you borrow and lend would be useful. Too many countries have way too high a burden of dollar denominated debt and euro denominated debt. And so, I mean, for my own
01:01:05
Speaker
part, I think that currency mismatch is a real linchpin in the poor country debt problem. And I think that there are possible solutions to that, including developing debt instruments that allow for borrowing and other kinds of currencies.
01:01:17
Speaker
The New Development Bank just did its first bond issue in South African Rand and is going to start lending in multiple currencies as a way to mitigate the exchange rate risk associated with exposure to the dollar specifically. So I think that's really interesting and exciting from the perspective of poor country debtors. And I think, I don't know if there's an analog to that at the household level. You have to forgive me. I think about this in global terms and that's where
01:01:45
Speaker
I don't think about it as much in household terms. The opportunity to diversify your creditors is not quite this. It doesn't look the same at the household level as it does internationally. Yeah, currency issue is not an issue. Correct. And a lot of households in the United States right now, debts are increasing. They're borrowing to finance current consumption. They're borrowing to finance medical costs, to finance the rising cost of energy.
01:02:10
Speaker
I'm not in a hurry to encourage people not to do that. Were they not going to eat? Not going to get necessary medical care. So I think some of the issues facing households are structural, associated with the price of necessities in the United States, associated with depressed real wages over time, among other issues, and inequalities between labor and capital. And so I'm reluctant to say that. But in terms of policy, we need to stop spending so much on guns and ammo and military bases. And we need to start feeding people and taking better care of
01:02:40
Speaker
I would love to see us manage our debt problems in this country by thinking seriously about foreign policy and what we spend our money on in terms of war and weapons of death and destruction. That's where my heart is.
01:02:53
Speaker
Efficiency is the one thing that I would add to that, right? So the healthcare system is hugely economically inefficient, the military's inefficient, construction's inefficient. There's so many things, so many, it seems like there's so many ways that we could save money and still have the, you know, build the things that we're trying to build. But it has been super fascinating. I really appreciate your perspective and your coming on. Sasha Brieger-Busch, thanks for coming on the Free Mind podcast and we'll see you soon. Matt, thanks for having me. Appreciate your time.
01:03:18
Speaker
The Free Mind podcast is produced by the Benson Center for the Study of Western Civilization at the University of Colorado Boulder. You can email us feedback at freemind at colorado.edu or visit us online at colorado.edu slash center slash Benson. You can also find us on social media.
01:03:38
Speaker
Our Twitter, LinkedIn, and YouTube accounts are all at Benson Center. Our Instagram is at TheBensonCenter. And the Facebook is at Bruce D. Benson Center.