Peak finance

At Project Syndicate, A Tale of Two Debt Write-Downs by Adair Turner. Opening paragraph:

At the end of 2015, Greece’s public debt was 176% of GDP, while Japan’s debt ratio was 248%. Neither government will ever repay all they owe. Write-offs and monetization are inevitable, putting both countries in a sort of global vanguard. With total public and private debt worldwide at 215% of world GDP and rising, the tools on which Greece and Japan depend will almost certainly be applied elsewhere as well.

An advanced economy by definition contains a well-developed financial sector. Like a mill turning grain into flour, a bank can turn one dollar of money into ten or twenty or even thirty dollars of credit. The more well-developed the financial sector, the more credit it can create from a dollar of money. The more credit and the more debt it can create.

When the economy reaches peak finance we get a financial crisis. If we're lucky debt implodes, reducing the level of debt and opening the door for a new period of credit-based growth. If we're lucky, the implosion happens on someone else's watch.

After the Great Depression we learned how to prevent the implosion. When the U.S. reached peak finance around 1974, it was implosion time. We avoided the implosion by, among other things, increasing the public debt:

Graph #1: The Federal Debt

We avoided the implosion. If debt was a burden on the economy, the burden was not relieved because there was no implosion. As a result, productivity fell and remained low for twenty years.

During most of that time, total debt grew apace with government debt. We had nearly five dollars of total debt for every dollar of Federal, and the ratio remained at that level until the latter 1980s.

Graph #2: All the Debt as a Multiple of the Federal Debt

By the early 1990s the ratio had fallen to about four dollars total per dollar Federal. Suddenly, then, there was "the new economy". The economy grew, and the Federal budget was balanced, and private debt grew. Soon the ratio was back up to $5 and the economy got sluggish again.

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If write-offs and monetization solve the problem for Greece and Japan and around the globe, it will be because private debt has been reduced relative to government debt.

The trouble is, our finance industry knows how to take a government dollar and instantly mill it into a cloud of new debt. The trouble is that we have a sophisticated and advanced financial sector. The trouble is peak finance.