Debt, Lockdown, and the sinking feeling that something isn't quite right.
Updated: May 18, 2020
Harley Brewer“There is no magic money tree”Theresa May
“Now that I am to lose my house as well as my self-respect... passing for me will be a huge relief”.Nigel Hurst, who took his own life with an outstanding debt of £166,000 “In winter, I’ve taken a child to the supermarket to buy them a coat and shoes.”Anonymous TeacherWhen a debt is heavy enough, its weight can no longer be lifted. Under the pressure, even Atlas's knees can buckle. Heaving, grasping for purchase to move the immovable. For what? Life now is forever in service to debt. Time itself becomes an enemy, the interest growing faster than it can be paid down. What can you do? The debt has to be paid. Debt can feel like a personal failure, and it often comes with a deep sense of shame. Paying your dues is for many people the core of a moral life. What is left behind when this is no longer possible? The strains and stresses of debt can easily become too much. Like many others, Nigel Hurst made the decision to take his own life because he saw no other way out. Nigel is not alone. In England, 100,000 people in debt attempt suicide each year.The nation is in the grip of one of the greatest crises since the second war. We are living through a massive restriction of our movements to tackle the virus. Our Prime Minister Boris Johnson was hospitalised and several members of his inner circle, including the Health Secretary Matt Hancock, have tested positive for the virus. Predictions vary, but it is likely that the lockdown will have lasted for several months and Britain now has the highest death toll in Europe. In light of this the Conservative Government has begun a similarly unprecedented stimulus. Employees have been given 80% of their pay and business offered a mixture of grants and loans. Even so, we are seeing a slew of businesses go under including high street names, Debenhams and BrightHouse. Unsurprisingly, given that almost a third of Tory MPs are landlords, mortgages have been frozen and renters are still expected to pay – although they won't be evicted for non-payment. It is a similar story for those working 'off the books' and those in precarious work, many of whom are either ineligible for help or are expected to wait until June for payment. Universal Credit applications still take over 5 weeks, an ideological rather than bureaucratic necessity, with crisis loans available in the meantime. Despite the obvious shortcomings, the total amount is even bigger than the financial crash bank bailout and its scope is far broader with payments given directly to people on a scale previously unseen. You would not be alone in thinking something is amiss here. Didn't we run out of money? The ex-treasury secretary Liam Byrne left a note for his Conservative successor: “I'm afraid there is no money”. Since 2010 we have been told the same story. We're skint. The last labour government spent recklessly, creating a huge government debt and causing the global financial crash – the real culprits, now almost entirely absent from the national discussion, were banks selling junk mortgage bundles. It makes sense – so long as we imagine that the country is like a household. If I overspend, I will end up in debt, eventually the debts start growing faster than I can pay them off and I could lose everything. So I start to cut my spending, selling off any assets I have, and working longer hours. It's inescapable: the debts need to be paid. For the past ten years our Government have been treating our country like this household and the cost for this debt repayment have been staggering.This process is austerity. It is the de-funding of the services that keep our country going and hold our communities together. It is the closing down of libraries, hospitals, and care homes. To date, austerity is estimated to have claimed 130,000 lives and has led to some staggering statistics, with an average of nine children in a classroom of thirty being in relative poverty and inequality reaching levels not seen since Dickens. It would seem however, that we have no choice here. If the story is to be believed, we have to pay the debts and although it would be great to fund our public services, we just can't afford it.
Coronavirus has abruptly changed this story. Rishi Sunak, the current Chancellor, has written a 'blank cheque', announcing that this is 'no time for ideology'. The current government plans involve a mass funding of the NHS, including the creation of a whole new hospital – 39 fewer than Johnson pledged in December. The money involved in this and the stimulus package far exceeds anything that Labour was laughed at for suggesting in the general election. Then it was considered impossible, now it is deemed necessary. But how? There was no money in December so why would there be money now? And if there is no magic money tree, where has it all come from?Answering these questions is key to understanding our political situation and it starts with getting clear about what money is.Money is central to our lives, but we tend to have a vague understanding of it. Money, we usually believe, is finite. It is like gold. It has value because there is only so much of it and because there is demand for it. If the government prints money, then the money is worth less because the supply is greater and the demand has stayed the same. Again, this is like gold which is only valuable because there is a limited supply. If anyone could make money, or gold, at home, its value would go down. Money, on this understanding, is a commodity. This theory is why money used to be tied to gold, which would back up the commodity value of the notes in circulation. It is this understanding of money as a commodity that leads to the impression we have that it is possible for a country to run out and to treat money as a scarce resource. This is only half of the story however, a full understanding requires knowing how loans and mortgages work. Most people believe that people deposit money in banks, and the banks then give that same money out in the form of loans. The reason it is so crucial that the money be paid back is that it is other people's deposits. If people didn't pay back their loans then other people would not be able to access their own deposits. This fiction is repeated as truth, even in some economic textbooks; but many economists, and now the Bank of England, have admitted that this gets the relationship backwards. Deposits don't create credit, credit creates deposits. What this means is that when you ask the bank for a £100,000 loan, the bank doesn't give you money that it already has. The money is created when they create the loan.It almost seems like a joke, and it is. Millions of people have spent, and millions more will spend, their lives working to pay banks back money that they never had in the first place. And if you fail to pay, then the bank can take your house. All the time and work you have given to pay off the mortgage will be forgotten and you will be left with nothing. It is truths like this that led Henry Ford to say, “it is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”The way loans are created shows that money is not just a commodity, it is also an IOU. In other words, money is debt. We can make this clearer with an example. Imagine a close knit village similar to one in Britain today. Matthew goes into his local shop and picks up some bread and oat milk. He discovers when he tries to pay that he has left his money at home and Mrs Davies, the traditionalist she is, refuses to have a card machine. Because he is a trusted man he writes her an IOU note for £5 and Mrs Davies is happy to accept it, knowing that Matthew will pay it back. Later, Mrs Davies runs out of change with a customer, so she passes them Matthew's IOU – which they are happy to accept as everyone in the village knows, and trusts, that Matthew will pay. It gets passed around like this for weeks and has essentially become money, each person accepting it on the trust that Matthew is good for it. Eventually though, Matthew is tired of owing the £5 and he tracks down the person with his IOU and pays him, ripping up the IOU as he does. The money which was created through Matthews debt has now been destroyed. In a similar way, when you pay back your mortgage you are destroying money. Once the debt is gone so is the money because money is a debt. A similar event happened during the creation of the Bank of England when some bankers loaned the government money to create the first bank notes. People could then trade these notes in the knowledge that the government would pay them the money on the note should they want to cash it. The original sum was £1.2 million, which still hasn't been repaid. If this debt was ever paid back, then the money system would collapse, as the debt basis of the notes would no longer exist. The memory of this event is printed on every note, “I promise to pay the bearer on demand the sum of ten pounds”. Check your pocket: money is an IOU.In other words, in order for there to be money there has to be debt somewhere. Which is part of the reason why almost all of the worlds countries are in debt. A consequence of this is that paying down debts in one section of the economy creates debts in other areas. For instance, when the private sector starts paying down their debts, the government takes them on.Let me explain how this process works. Paying back a creditor most often means I stop spending on goods and services, businesses then have less money to pay their staff, buy in stock, and so on. Because their staff get less pay, they have less money to spend which again leads to businesses earning less as these people spend less and so we see a downward cycle begin. Left unchecked this spiral can lead to a recession as more people lose jobs and businesses close. In response to this the government then has to pay out more money in social services like paying the people who have lost their jobs, or topping up people's wages whose hours have been reduced. We can see then that the paying down of private debt has increased government debt. A similar process happens in reverse when the government reduces its own spending to pay down debt. Take the example of student debt. It was once the case the government shouldered the burden for the cost of university, however, my generation were told that this is no longer possible. What would have been paid for by government is now paid for by students, and since most students are unable to pay up front, it becomes a debt. Hundreds of thousands of students are now tens of thousands of pounds in debt to pay for their education. The same is true with reductions in benefit payments and the increase in the use of payday loans. The government reduces its own debt, we end up in debt. Balancing the governments accounts means shifting debt onto the private sector: us.Essentially, common sense understandings of economics do not apply to the modern economy – it is not like a household. The government getting into debt is our own debt reducing, and the government paying down its debt is our debt increasing. It is not possible to remove all debt as since money is an IOU, without debt there is no money. I am sure you can see that this whole system is very unstable and prone to crises. How does this apply to the government finding money to pay for the coronavirus stimulus that was not available to help the NHS, or social services, before the crisis? Well, the truth is that the money was always available, since the money supply is neither scarce, nor finite. They just didn't want to use it. Now, in the face of an unprecedented crisis, they have been forced to do so. Rishi Sunak revealed too much when he told us that this is no time for ideology; ideology has formed the basis of Tory policy for ten years, it has had nothing to do with economic reality. The real reason for austerity is a transfer of wealth and power from the poorest people in society to the richest. The Conservatives will use this crisis as another excuse to impose austerity on those least able to afford it. Already a free-market think-tank has begun advocating for a reduction in state pensions to pay off the coronavirus debt. Be prepared to see the coronavirus used as the justification for a whole new round of cuts to everything from councils to universal credit, and increases in university fees. The next time the Queen dons her favourite million pound hat she will again tell the nation, “we must tighten our belts” – by which of course she means us, not her. The social and ecological crisis we lived in before coronavirus was created by the logic of economic scarcity, returning to orthodoxy will only lead us back to the previous crises. It wasn't working before, and it will not work this time. More lives will be lost and ruined. To fight back we must understand how the economy works and challenge the government and media narrative; paying off the government debt is not the act of common sense we are told it is. We have a choice ahead of us: whether the poorest in our society should hold that debt, or the government. Don't be fooled, placing the burden on the poorest in society is not an economic necessity, it is pure ideology. Crises are opportunities for radical change, and the nature of that change is not yet written. We could see a return to, and increase of, austerity, but if we organise against it there is an opportunity for a shift in our society. Just as at the end of the Second World War, when we created the NHS and the welfare state, we could now change the relationships between the rich and poor, and our relationship to the natural world. Stimulus in the form of a Green New Deal creating new, union, sustainable jobs for everyone and an end to the ecological crisis is possible. The current crisis opens up political possibilities that simply did not exist before. In the words of Naomi Klein: “sometimes, in the face of crisis, we grow up—fast.” That is exactly what we must do.