Forgive Us Our Debts
The project examines personal, corporate, and public debt in the UK within a moral framework. (2019)
The second in our series on debt. Johnna Montgomery discusses whether we can re–engineer debt to build a sustainable, inclusive economy. 25/04/2019
As Brexit dominates the news and sucks all the oxygen out of Westminster, the UK economy resembles a Zombie hoard’s directionless march in search of sustenance. Meanwhile the UK faces an economic shock, the size of which no one can predict as long as the outcome of Brexit remains uncertain. The reason the UK economy is so fragile in the face of external economic pressure is because of private debt, which currently stands at £1.62 trillion (very close to the £1.71 trillion of public debt). The interest paid on this debt is much higher than what the government pays. £51 billion a year, or £140 million a day of interest is remitted from households to the financial sector to pay for this outstanding debt. This mountain of debt sits on top of the UK economy, sucking the vitality out of it by colonising the future as gripped with uncertainty and mired in debt.
This is the impact of the 2008 financial crash, when the UK economy was restructured, making austerity policies the centre of gravity. This has considerably changed the role of public and private debt. The Bank of England uses monetary policy to support the ailing financial industry, which relies on household debt as a major source of revenue. Meanwhile the Treasury pursues fiscal consolidation in order to sustain the on–going subsidization of finance with cuts to government expenditure elsewhere. That is why debt, as a phenomenon, is calling for proper attention and generating so much interest among people questioning in what kind of society do we want to live.
Theos and St Paul’s Institute’s report ‘Forgive us our debts’ starts a new conversation about the role debt is having in our society and the burdens of the existing system for many, particularly the more vulnerable. Examining personal, corporate and public debt in the UK the report discusses the main areas of concern within a theologically informed moral framework. Debt is not merely an economic or financial issue, it argues. Indebtedness has far–reaching effects in daily life. It raises not only questions of debt sustainability, which are a serious preoccupation in the UK economy, but more fundamental ones, such as those addressing debt objectives, debt relations and debt social effects.
I share these concerns, and in my new book, Should We Abolish Household Debts?(Polity, 2019), I address the economic, political, cultural and psychological consequences of indebtedness to explain how debt impacts the economy and society. To redress the most pernicious aspects of indebtedness and end the debt–dependent growth model supported by the government, I put forward the case for household debt cancellation. Sharing with Mladin and Ridpath the concern for the welfare of people and the need to build for a better future, I advocate for economic and social change to provide a way forward.
Should We Abolish Household Debts is dedicated to the debts of households (or the segments of private debt held by individuals who organise as households) and offers practical examples of how we can bring about economic renewal from below, by implementing already widely used methods of debt cancellation, such as the system of write–downs and write–offs that cancelled inter–bank loans in the wake of the 2008 financial crash.
The aim of the book is to help with the understanding of why debt is playing a new role in today’s economy and society, and how this can be changed. This starts with a basic understanding of why debt is big business. We need to challenge the idea of money as coming off the printing presses at the national mint. This image is obsolete and keeps us in the dark. Notes in circulation represent only 2 to 4 percent of all money in circulation. This makes it reasonably challenging to grasp the scale and scope of the global financial system that operates with trillions of dollars, euros, pounds, yen, and so on, within a complex digital infrastructure. However, this can and should be explained simply: money is made when commercial banks make loans. In these cases, banks do not act as intermediaries (taking deposits and lending out from those deposits) but as money–creators because they are the originators of debt contracts.
Debt creates money. At the stroke of a keyboard lenders create money by issuing new loans. This is why the UK economy is drowning in debt: because debt is a ‘license to print money’ in the digital economy. Retail banks issue loans for individuals and then distribute ownership claims to the revenue streams (interest payments, fees, and charges) from these loans throughout global financial markets. This business model makes lending to households extremely profitable for banks, feeding a finance–led growth or ‘debt economy’.
If we think of the monetary system as an irrigation system, as I proposed in the book, the national political economy can be imagined as one large farm with many different types of crops, while being part of a larger global system of farms and crops in need of water. In these farms, credit (and debts) flows like water. Water can allow crops to flourish but it can also flood the land with dramatic consequences. In the same way, credit can foster human activity or it can drown it in debt. As Mladin and Ridpath note in ‘Forgive us our debts’, credit and debt should be assessed in terms of their purpose and the effects they have on human social relations. Moreover, how the irrigation system is organised is up to us as a society. The flow of credit in the economy is a matter of political decision, not something natural or inevitable. We can change the system and ‘repair’ the damage done by its inundations.
Debt cancellation can help us to do exactly that, by targeting harmful debt, providing relief to people and, by extension, creating an uplift in the economy and society. I sketch in the book how can we abolish household debt, considering the United Kingdom and the United States as examples. The creation of a household debt cancellation fund with half of the declared value of cash outlays and the full value of credit guarantees offered to the financial sector ten years ago is considered a first step to abolish harmful debts (including housing debt, student debt, debts originated in the ‘debt boom’ between 1997–2007 and those considered ‘high cost debts’ between 2008–2018 plus fees, charges and penalties that are added to credit products). By hacking the existing methods of write–down (i.e. using a Long Term Refinancing Operation) and write–off (i.e. discharging nonperforming loans) we can abolish and re–engineer debt, creating an endpoint to debt dependency for individuals, lenders and national economies.
The ideas of debt cancellation discussed in ‘Forgive us our debts’ and the plan I put forward in Should We Abolish Household Debts? are part of the building of an alternative path for the economy, but above all, for the common good.
The views expressed in this article do not necessarily reflect the views of Theos and St Paul’s Institute. For our views, read our report on debt.
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In the first of our blog series on debt, Luke Bretherton sets out how debt and credit frame our moral relations. 24/04/2019In Brief