Austerity the establishment scam and how and why being turned intom peoples debt

The real UK debt problem is personal debt and is being actively promoted by the Chancellor through austerity and quantitative easing for the "parasite banks". Many people in Scotland are on the brink financially, but one group in society benefits - Britain's banking sector

COMMON WEAL Policy’s analysis piece on the UK economy last Thursday [25 February] argued that George Osborne’s commitment to austerity flied in the face of the fiscal policy prescriptions of just about every economist on the planet. Nonetheless, we argued, he was likely to ramp up the madness as the weakening of the global economy meant he was going to miss his arbitrary target for a budget surplus by 2020 unless he made yet more cuts.

Low and behold, the next day, our Chancellor announced that “we may need to undertake further reductions” as the global picture now looked “markedly worse”.

Channel 4 Economic correspondent Paul Mason pointed out the obvious contradiction of on the one hand stating “the economy is smaller than we thought” and on the other cutting people’s wages and jobs – deliberately sucking demand out of the economy when economic activity is grinding to a halt is the medical equivalent of taking a saw to a gaping wound.

"Far from austerity being a policy of reducing debt, it is simply a mechanism for transferring the debt burden (that governments incurred from bailing out the banks) to individuals."

In this piece we aim to delve deeper into this economics of the madhouse by looking at the consequences of austerity economics on personal debt. Far from austerity being a policy of reducing debt, it is simply a mechanism for transferring the debt burden (that governments incurred from bailing out the banks) to individuals. That personal debt trap damages the economy as a whole and makes people extremely vulnerable to a financial shock, but it does help one group in society – the bailed out banks, which suck up money in the interest paid on debt repayments in a great transfer of wealth from the poor to the rich.

Two reports published over the past week should make the scale of the problem absolutely clear. The Bank of England’s 'statistical release' for January shows the extent to which personal debt has risen over the past year (and especially the past few months).

Chart 9 clearly shows how personal debt has risen considerably since 2013, with a sharp increase over the past 3 months as the global economy has stuttered. The rise in consumer credit in January was the fastest in over a decade. This explains how, for example, retail sales have continued to rise while wages stagnate – unsustainable use of credit cards and loans.  

Chart 7 shows how over the same period debt on house buying and re-mortgaging of existing properties has increased – rising house prices combined with flat lining wages inevitably drives increased personal debt. The fact that mortgage approvals are also at a two-year high at a time of stagnant wages suggests a bubble in the housing market.

Looking at bank credit from a more long-term view, the FT graph is revealing of the trend in increased credit since the crash as banks have returned to the same behaviour that had created the massive credit boom in the 2000's prior to financial meltdown.

The picture in Scotland is no less ugly. A report by the Scotland Institute last week found that median household debt had increased by a whopping 65 per cent since 2008. While personal debt in Scotland is still one of the lowest in the UK, lower house prices means it is more likely increasing debt is being spent to cover everyday living costs.

The Scotland Institute’s table 3 is revealing of how nearly a decade of wage repression is making those near the bottom of the income bracket look elsewhere to maintain their income.

Look at the third lowest income decile in particular: the percentage of their income that comes from wages has more than halved from over 50% to just over 20%. At the same time, their reliance on social security has nearly doubled, rising from 36% to 66%. Far from the Tories claims to have introduced policies that reduce people’s need for welfare support, their wage squeeze has actually increased the working poor’s need for financial support from the state to keep their head above water.

Of course the social security support does not make up entirely for the wage drop, and as table 4 shows basic living costs have risen over the same period.

While food costs have generally risen by about a quarter, look at fuel costs: for the poorest half of Scots it has approximately doubled in the space of five years. The past few years of exceptionally low oil prices has only brought very slight respite. The table mixes up rents and mortgages with other living costs but we know that rent prices in the private sector have continued to surge after the recession to all-time highs in Scotland.

There is, therefore, a mismatch – falling incomes and growing living costs means something has to give, and so far that something is unsustainable levels of personal borrowing.

Banks know that with wages in historic decline, the ability for people to pay back these debts is reducing not increasing, but in many ways that is how they like it – if wages grew and inflation grew it would eat into how much interest banks would get on debt repayments, which is one of their most important sources of profit.

American economist Michael Hudson calls this process “debt deflation”, and says it has been the specific strategy of the American and US Governments post-crash to hold down wages while boosting asset prices through quantitative easing in order to improve the balance sheets of the banks at the expense of the majority.

"Banks gain by making labour pay more interest, fees and penalties on mortgages, and for student loans, credit cards and auto loans. That’s the postindustrial financial mode of exploiting labour and the overall economy." Michael Hudson

Referring to the US Federal Reserve, he states: “There are two sets of prices: asset prices and commodity prices and wages. By “price stability” the Fed means keeping wages and commodity prices down. Calling depressed wage levels “price stability” diverts attention from the phenomenon of debt deflation – and also from the asset-price inflation that has increased the advantages of the One Percent over the 99 Percent.”

He continues: “Wall Street isn’t so interested in exploiting wage labour by hiring it to produce goods for sale, as was the case under industrial capitalism in its heyday. It makes its gains by riding the wave of asset inflation. Banks also gain by making labour pay more interest, fees and penalties on mortgages, and for student loans, credit cards and auto loans. That’s the postindustrial financial mode of exploiting labour and the overall economy. The Fed’s QE program increases the price at which stocks, bonds and real estate exchange for labour, and also promotes debt leverage throughout the economy.”

The exact same can be said for the City of London – the percentage of their loans that go to productive economic development is tiny (as the New Economics Foundation's graph below shows); they extract wealth from the productive parts of the economy through indebtedness. The Bank of England’s quantitative easing programme simply boosted banks stock market value and re-inflated asset prices, which has been why the post-crash era has seen one of the greatest transfers of wealth in human history from poor to rich. Osborne and BoE chief Mark Carney preach 'getting the debt down', but they are actively promoting the increase of household indebtedness to boost bank profits.

If you don’t believe me that banks are parasites on the productive economy, how about reading the Bank for International Settlements, an international company owned by Central Banks and known in financial circles as ‘the bank for Central Banks’. In a recent paper on the relationship between the financial sector and real economic growth, they found that “manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms.”

They continue: “…By draining resources from the real economy, financial sector growth becomes a drag on real growth.”

The paper concludes with this statistic that should shock us all: “…a highly R&D-intensive industry located in a country with a rapidly growing financial system will experience productivity growth of something like 2 percentage points per year less than an industry that is not very R&D-intensive located in a country with a slow-growing financial system.”

"By draining resources from the real economy, financial sector growth becomes a drag on real growth." Bank for International Settlements

In essence, the Bank for International Settlements is saying that banks are a parasite sucking the blood out of the real economy.

And here’s the problem: Britain is unusual for having one of the most bloated and concentrated sector of big banks on the planet, and we have a Tory party in power that receives more than half of its funding from that self-same financial sector.

To add insult to injury, the lifelines that many of us have in social security are about to be torn from under: the IFS stated earlier today [2 March] that the move to Universal Credit will see living standards fall for most of the working poor over the next five years. Add to that more Osborne austerity, and personal indebtedness is only set to continue rising.

"Next time someone says to you ‘we need to get the debt down’ ask them: whose debt? Government debt is perfectly manageable with almost zero interest currently being paid on it; whereas personal debt is a ticking-time bomb."

Next time someone says to you ‘we need to get the debt down’ ask them: whose debt? Government debt is perfectly manageable with almost zero interest currently being paid on it; whereas personal debt is a ticking-time bomb that the forces of austerity, QE and the parasite banks are driving us into penury with.

In Scotland, we need to do what we can to tackle the dominance of the parasite banks over our economy, and Common Weal will be publishing a paper next week alongside the New Economics Foundation, Move Your Money and Friends of the Earth Scotland about how to do this. Stay tuned.