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A programme for regeneration: A practical look at the UK economy for the concerned citizen – Part One

Business Debt

Total US corporate debt is actually much higher than usually estimated.  Adding the debt of small medium sized enterprises, family businesses, and other business which are not listed in stock exchanges adds another $5.5 trillion.

In other words, total US corporate debt is $15.5 trillion, 74% of US GDP.  Remember, this is just business debt, not including government and personal debt.  

All the signs are that there is going to be a major collapse in US economy and the dollar.

Although I can find the total of US business debt I cannot find  total UK business debt as yet. However, we have the following report:

“Figures from the accountancy firm EY show British businesses took on debt at more than twice the normal average growth rate since the crisis began and are on course to have borrowed £61bn in total by the end of 2021.” (Guardian.)

Independent high street businesses could face a “tsunami of closures” after their debt climbed to almost five times the level it was before the Covid-19 pandemic, as shops, hairdressers, bars and restaurants battle to survive.

About 150,000 small businesses have racked up £2.3bn in debt, up from £500m before the pandemic, based on government-backed loans and not including rent debt, according to a report from Bill Grimsey, the former boss of Wickes and Iceland, who has backed a series of investigations into the state of the high street. Businesses now owe the government £4.5 billion in Covid relief loans.

Personal Debt

UK Personal Debt People in the UK owed £1,714.4 billion at the end of April 2021. This is up by £36.8 billion from £1,677.6 billion at the end of April 2020, an extra £695 per UK adult over the year. The average total debt per household, including mortgages, was

 £61,509. If the economy does not recover then much of this debt will be defaulted.

Implications

Vast amounts of debt eventually become unrepayable or at least undermine the economy for decades if attempts are made to repay it.

Almost all this debt is owed to Financial Institutions, Foreign Governments, Banks and the rich.

The effect is to transfer the  tax taken from businesses and individuals and hard earned money from both businesses and workers to  financial institutions, banks and the already ultra rich.   As we have already seen, financial institutions are more involved in speculation than in supporting the real economy of production and services.

At present the UK does not have the equivalent of a Glass Steagall Act. This US act, dropped by the Clinton administration, stopped banks speculating with the high street deposit and saving accounts of depositors. Thus any financial crisis will impact on these accounts.  If the government keeps its word and protects savings up  to £75,000 this will then sink the government further into debt.

The possibility of the Government defaulting on debt is remote. It would finish the UK as a financial centre. But it can only maintain credibility if the pound is stable and does not lose too much exchange value with other currencies. But this is extremely problematic.

The pound will necessarily lose value if there is high inflation. This can be caused by three things.

1) the increase of money supply over and above production/supply.

2) the increase in the velocity of money circulation which can be understood as an increase in demand and a decrease in savings without either an increase in money supply or an increase in the supply of goods and services.

3) the decrease in supply of goods and services which necessarily increases their price.

Of course, inflation can be caused by a combination of all three and usually is. 

The only mechanism recent governments have used is to combat inflation has been to increase interest rates which makes borrowing more expensive and thus reduces it. The effect of increasing interest rates will be to put heavily indebted companies out of business because they will not be able to afford the increased interest. This means more workers out of work and a reduction in supply.

The USA is facing precisely this dilemma at present. Its answer is a major investment programme. But far too little and too late, undermined by the expected major instances of fraud especially prevalent in the arms industry.

Non the less, government investment is a step in the right direction.

If directed into research, infrastructure, technical and scientific education, skill training, a rebirth of traditional manufacturing of essentials and a concentration on advanced technological manufacturing then much can be achieved. Supply will be increased and anti-inflationary pressure will follow.

The reality under this UK government is, however, extremely bleak. Cut backs in investment in our infrastructure and tax breaks for the rich is all they have to offer. The Bank of England is talking loudly about upping interest rates. This will lead to the worst of all possible worlds: “stagflation.” The combination of inflation and a stagnating economy. The disturbing possibility exists of this becoming a self-feeding downward spiral, leading to hyper-inflation and economic collapse.

Business and personal debt defaults are yet another matter.

As I write the media/business world is trying to talk up a UK business revival. But is it happening?  What we are actually seeing is a string of business failures, no doubt leaving large debts behind them.

At a personal level, the Covid outbreak and Lockdowns seem to have induced some change in private behaviour.  More people are saving and also buying long term stores of value such as gold and silver. Thus the velocity of income slows, inducing lower business activity. This may also slow inflation.

The working from home process both cuts business overheads re-office space and reduces the pressure on rents. This could be a good thing for the economy, undermining the rental drag on business and personal incomes.

One factor working against this process are the billions of pounds being pumped into the country from the USA, China, Lebanon and the Middle East buying up property, both business and domestic. This is driving up property prices. This could well account for some of the present resilience of the pound exchange rate. This cannot last.

If we do suffer major defaults on business and  private debt, then this will hit the UK banking system hard.  And given the large amount of US treasury bills held by UK finance, the much expected collapse in the dollar would also be a very large hit to liquidity. As happened in 2008, banks will stop lending and call in loans to maintain liquidity.  Alternatively the government will use Q.E. early to stop them going bust. This will aggravate the asset balloon even more and be a huge pressure on inflation while not increasing production one whit.  The classic symptoms of stagflation – inflation without economic expansion or even decline.

There has been a massive growth in debt.  In many cases it has been the lack of income or overspending which have forced people into debt and debt defaults. Unrestrained credit card debt is a major result of restricted personal incomes .  

Business debt is normal, it is the way in which businesses fund expansion and innovation.  But Executive  buy-outs, from borrowed money, leading to Zombie firms is not natural but destructive as are most asset stripping exercises. The laws governing such activities need to be tightened.  Firms not making much profit but producing essential goods and services, providing jobs,  should be converted into not-for-profit firms owned as co-operatives or taken over by the state rather than allowing them to fold.

Spiralling government debt is not natural nor necessary. It is a policy pursued by those in power to enrich the financial markets, banks and rich people.

Printing money to finance specific projects which will employ people and create wealth will not have inflationary effects.  However, helicopter money, as being distributed by the USA is inflationary.  This is now being proved.  Much better to expand social provision and supply by investment than increase demand against fixed assets.

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