It’s not just me

It can be difficult deciding what to write next.  Everything seems to have been said already.

And then along comes the weekend newspaper.  The Times Saturday June 27 and Philip Aldrick.  If you have a subscription you can read his article We ought to be scared: too much debt is being combined with too much blind faith.

In simple terms what he was saying was that some important economic indicators are heading the same way they went before the big crash – the  2008 disaster brought about by banks lending too much to people who could not pay them back.

So – money is cheap thanks to Quantitative Easing and very low (or zero) interest rates.

Probably as a result, lots of borrowing has been going on – according to the article $57 trillion in 7 years – which is massively more than the economic growth in the same period.

So debt is now 286% of GDP.  Is this worrying?  Well it was less than that – 269% of GDP – before the crisis.

And where is the money being lent?  “Emerging markets” seems to be the answer – Latin America, the Middle East and Africa are all running deficits borrowing from Western economies.

As I see it, the problem is simply our debt-ridden system.  Because of low interest rates in the Western economies, bankers need to find someone else to lend money to who will pay high rates of interest.  Germany is financing Greek debt at higher interest rates than it can get elsewhere in the EU, but even this is not enough to produce returns for the financial sectors in the West.

As a result money is lent at higher risks to countries which offer a much higher rate of return.  This means money in junk bonds and frontier bonds.  Or put another way in risky companies and risky countries.

Some risky investments will go bad and the question is whether the financial gurus have got it right this time and balanced the risk with the return or whether, as happened before 2008, they went for return at all costs and ended up offloading the risk onto governments who did not dare to let the banking system (and therefore the banks) collapse and so underwrote the debts in massive bailouts.

My answer is simple.  If commercial debt is outlawed, then bankers and other financiers cannot do this to us again.

This is not an easy fix, because we have been brought up on the present system and imagining a different world is difficult.  And bringing in a ban on commercial debt will require considerable planning and ruthless implementation (because any loophole will be exploited because the financial sector is all about exploiting situations – such as different interest rates in different countries – to make a profit).

Is this a crazy idea?  Possibly, but we have tried for years to bring the banking sector under control in the UK and we keep on ending up with scandals – PPI and other misselling scandals, LIBOR and foreign exchange rate fixing, helping launder drug and terrorist money…

So let’s try something new!

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