By Isaiah Ritzmann
Published in June 2020
Our economy is burdened and vulnerable to increasing debt. The COVID-19 shutdown has people deeply concerned about the economic effects. Before the virus arrived alarm was already being raised that the growing debt burdens of corporations, governments, and households was becoming increasingly unstable. It wasn’t just the size of debts but their size relative to the rest of the economy. The Institute for International Finance in April of this year estimated that at the end of 2019 global debt-to-GDP ratio is over 325% (or the world owes $3.25 for every dollar it makes). Furthermore they estimate that total global debt is 40% higher than it was before the financial crisis in 2008. COVID-19 is adding trillions to this collective debt.
High Corporate Debt
The most widely recognized risk is corporate debt. Since the last financial crisis corporate debt has grow tremendously. Aside from some tech giants almost all corporations have debts far greater than assets or revenues. In many cases unprofitable corporations are issuing bonds and then using the money raised either for executive compensation or to buy back some of their own stock (creating the appearance of company profitability). In 2009 the average US company owed $2 for every $1 in earnings. Now the average is $3 owed for every $1 earned. Some major companies – especially auto manufacturers, oil producers, and airlines – owe $8 to every $1 earned. More and more loans are being given to corporations that either have poor credit histories or large amounts of existing debt. Some estimate that more than half of corporate debt, particularly in the United States, is subprime and at serious risk of defaulting.
High Government Debt
Government debt, in contrast, is seen as more stable. Yet government debts themselves have grown disproportionate relative to their revenues and respective economies. In Canada our federal government has a debt burden of about $770 billion, which is more than double annual government revenues or about 35% of Canada’s GDP. Besides the federal government each individual province has considerable debt obligations. Ontario, for example, has a debt expected to rise to $350 billion this year, which again is more than double annual government revenue. On top of federal and provincial burdens Canadian municipalities also owe debt, an estimated collective $61 billion across the country. Unlike their provincial and federal counterparts, however, municipal debt is subject to legislation that significantly limits it.
High Household Debt
Which leads us finally to household debt, both in Canada and abroad. The OECD estimates that households in the developed world on average owe more than a dollar for every dollar they earn. Canada’s average household debt-to-income ratio is much higher, at over 175% (that is Canadians owe almost $2 for every $1 they earn). The Bank of Canada estimates that Canadian household debt is about $2 trillion, most of which is tied up in mortgages.
Until recently analysts were ambivalent about whether household debt was risky or not. On the one hand Canada’s regulatory framework is trusted as a stabilizing force. On the other debt-to-income ratios have been growing and with it vulnerability to outside shocks and disruptions. The Bank of Canada points out, for example, that about 8% of indebted households have a 350% debt-to-income ratio. The repercussions if they default, on themselves & then everyone else, could be staggering.
Belief in Economic Growth
Reviewing this landscape of liabilities begs the question: why are some debts risky and other debts safe? After all what strikes the average person is how in all these cases – household, corporate, and government – debt out-sizes income by quite a considerable degree. In such a situation all debt could seem precarious. Why is it then that economists trained in the dynamics of debt & risk see some of these debt burdens as more or less stable?
The simple answer is belief in economic growth. As long as the economy grows every year, and grows faster than debt, things can remain stable. Governments can carry sizable debts relative to their revenues as long as the economy keeps growing because a growing economy means more money in the future to pay off debts. Large corporations manage in a similar way. As long as there are realistic possibilities of future profits they can afford to take on more and more debt, their creditors trusting that future growth outweighs future liabilities.
Limits to Growth
The problem is we have reached the limits to economic growth. Economic growth for three centuries has meant the expansion of the money economy. It has meant that each year more money is spent on goods and services than the year before. This compounding growth means the size of the economy doubles every few decades. The economy is currently ten times larger than it was in 1950. Juliet Schor in her book, The OverWorked American notes that this growth means we could produce our 1948 standard of living by working a four-hour day or working six months of the year. Instead all we have to show is more debt and the need to work harder for more growth.
Long before the introduction of the GDP people questioned the perpetual nature of the growth economy. In the mid 19th century John Stuart Mill noted that in the real world everything grows but nothing grows forever. Since limitless growth is impossible at some point the growth economy has to come to an end. When GDP was first introduced even its creator, Stanley Kuznets, warned that growth in the amount of money was not the same as the growth in human welfare. Other critics noted that sometimes growth in GDP comes at the cost of human happiness and health.
The Cost of Growth and Debt
The growth economy and GDP are critiqued by environmentalists because the contributions of nature are ignored and not counted. Worse destroying nature tomorrow is counted as a benefit if it makes a dollar today. Thus all over the world economic activities that raze forests, exhaust soils, pollute water, deplete fisheries, and warms the atmosphere are counted as positive as long as they make a buck. The economy has grown in size by ten times since 1950, but ecologists estimate that 60% of the ecosystem has been degraded.
We may have more money in the world than ever, but we also have less clean water and air, less trees and less fish, more eroded and depleted soils, and a less stable climate.
The earth is teaching us an elemental lesson: nothing in a finite world can grow forever – including the economy. It is time to rethink our collective relationship to debt. Rather we need to expand thrift, sharing, debt forgiveness and interest-free loans. It is this ethical repertoire, applied at various scales and in creative ways, which can pave the way forward. What other choice do we have?
