G. Wilpert: Welcome to the Real News Network. I’m Gregory Wilpert joining you from Quito,
Ecuador. UK households are spending more than their
income at an unprecedented rate. Record-busting levels of privately held debt
are also accompanied with stagnant or even falling real wages in the UK. The situation is so bad that members of Parliament
have started calling for a public inquiry into 200 billion pounds worth of privately
held debt in the UK. Perhaps even more disturbing is the argument
of our next guest who says that the only thing keeping the UK out of recession is the growing
and unsustainable levels of privately held debt. Joining us today to discuss the growing private
debt crisis in the UK is Ed Smythe. Ed is economist and researcher at the financial
research organization Positive Money. He worked for nine years in asset management
and as an equity analysts and macro economist. He recently wrote an article for Open Democracy
called “The UK is Hooked on Rising Asset Prices: What Happens When the Bubble Bursts.” Thank you for joining us at the Real News,
Ed. E. Smythe: Thank you for having me. G. Wilpert: So in your article you say that
the British economy is being kept afloat by unsustainable levels of privately held debt. What is the basis of this observation of yours? E. Smythe: So essentially and in fairness
it’s not just debt, it’s also capital gains. So the way to think about this is we can look
at the sectoral flow of funds in terms of how the UK economy is growing. At the moment we can see that the UK household
sector is running an unprecedented deficit, more than it was before the last financial
crisis. And in fact, more than it’s ever done in the
100 years of records that we have. Now the question is, how are they funding
that? And in part, that’s coming through debt, but
we argue that it’s also coming through massive capital gains over the last three decades
or so as interest rates have come down. So it’s the combination of both the debt and
capital gains that are funneling and funding that deficit. G. Wilpert: Some such as David Graber recently
also argued, and I think I mentioned in your article, compare the current private debt
level to the private debt levels that led to the 2008 global financial crash. So are we in this territory now, and is it
likely that the current private debt levels will repeat what happened back in 2008? E. Smythe: Yes, so I think it’s interesting. We had Mark Carney on record recently in a
speech that he made last week talking about the fact that household debt levels are actually
down relative to where they were, relative to incomes, before the last crisis. But actually that’s focusing on a bigger metric
which includes mortgages. If you just look at consumer and student loan
debt, that’s actually rising at the fastest rate ever. So it’s rising at about 31 billion pounds
per annum whereas before the crisis it was rising at about 25 billion. It’s also risen to the highest ever level
at about 315 billion. So there’s a clear red flag that to the extent
that private debt was the cause of the last crisis, it’s absolutely waving it today to
suggest that this could be a factor in causing the next financial crisis. G. Wilpert: I mean, back in 2008, one of the
detonating factors was that investors were partly misled about the nature of the debt
that they were taking on when they were buying the mortgages and so on. In other words, they were given AAA ratings
in the United States when actually they were very questionable loans that had been given
out. And when people couldn’t pay them off, then
the investors were caught unawares of the type of loans that they had. Is there any chance that something like that
would happen? Is there any misleading going on … Or what
would trigger, in other words, a possible crisis this time around? Raising of interest rates, what would be so
to speak the detonating factor if something were to happen? E. Smythe: Yeah, so strictly speaking, when
we talk about consumer and student loan debt, that doesn’t include mortgages. So it doesn’t necessarily relate to what you
talked about in terms of the mortgage coverage and that that occurred prior to the last crisis. But in answer to the question is there a risk
that many of these consumer and student loan debts have created on the backs of people
who might simply not have the ability to repay? Absolutely. We are seeing signs. Particularly in the PCP pending market for
autos that the availability of credit is at an alarmingly high level. There’s essentially a complacency in the market
which typically happens after many years of recovery where lenders reduce those checks
that should be in place. And therefore, once you’ve done that, you
create the condition by which even a small trigger might start to bring down the whole
sort of cascade, if you see what I mean. G. Wilpert: Uh-huh. And so what kind of proposals have you been
suggesting to push the UK away from debt-based, consumer-driven economy? E. Smythe: Well, in reference to the first
argument that I made, it’s not just consumer and student loan debt, and also the mortgage
debt market. It’s the fact that actually we’ve also been
reliant on a massive, massive expansion of net wealth. And in fact, the UK’s net wealth disposable
income ratio is now the highest for any developed economy ever, worse than Japan in 1989. So what we’re saying and what Positive Money
is advocating is a fundamental shift in monetary policy and the mechanism by which money is
being used to sustain economic growth. We want to shift from the policy whereby at
the moment we need very low interest rates to boost the price of assets or to enable
increased amounts of debt to generate a certain amount of household spending, the deficit
which is currently driving the economy, and instead shift to much more sustainable mechanism
whereby money is created by the central bank using zero interest perpetual bonds, an incredibly
constrained amount, which allows governments to then spend that directly into the economy
to get the sustainable increase in demand that we need. And in doing so, you could actually turn down
some of these other dials of ultra-low interest rates in QE. You could have a reduction for example in
asset prices, a reduction in the expansion of ever greater demand of credit. And instead, you’ve got a sustainable demand
function. So it’s the policy of overt monetary financing,
or QE for people is what we’d call it. And it seems to be the only mechanism by which
we can move from the current status quo to something much better. G. Wilpert: You recently spoke also at the
conservative party conference. What was the gist of your presentation and
how was it received there? E. Smythe: The presentation was cool after
the crash, and I suppose our argument was actually when we look at many sort of metrics,
it’s very difficult to suggest that the crash ever ended. So we’ve just experienced the worst decade
of real wages since the 1860s and perhaps a long time more. We’ve got record low productivity levels,
record low investments, record low interest rates, record high asset prices. So what we’re saying is, look, the situation
as it stands is simply not a normalized scenario. Therefore we have to be thinking about slightly
more radical options, both in terms of the way we hold the central bank accountable,
but also think about these other tools of overt monetary financing because it’s the
only mechanism this government can achieve its policy objective of achieving an economy
that works for everyone, and particularly for the younger generation. G. Wilpert: The proposal to me sounds a bit
like you’re suggesting the government should essentially spend more and essentially steer
away from the austerity policies of the past ten years or so. Is that correct? Is that a fair summary? E. Smythe: It absolutely is, but it’s with
a sort of modified agenda behind it as well because I suppose we are currently working
within a paradigm whereby governments, when they spend, are necessarily imposing a sort
of intergenerational tax on the next generation to pay that debt back off with interest. What we need, particularly given the intergenerational
transfers that we’ve seen to date, we need a system whereby we can fundamentally deliver
demand into the economy on the things we need, like infrastructure, education, and healthcare,
but without saddling the next generation with huge interest costs on this debt. What we need is a policy whereby governments
feel that they can spend a little bit more on those things without increasing the potential
for interest costs down the line. And that’s why overt monetary financing is
the only solution to deliver that step changing government spending and shift us back onto
a sound fiscal footing. G. Wilpert: And how do you think that the
Labor Party is on this issue which also just recently wrapped up their party conference? E. Smythe: Yeah, so we are having interesting
conversations with members of both parties. We think, you would imagine, that the Labor
Party should be more receptive to these arguments. At the moment they are focused to a large
extent on a national investment bank which delivers some small benefits. But we would argue it’s not big enough thinking. If you think about for example the problem
on the next 50 years, and I think it’s important that people do, the OBR predicts that the
government deficit will increase to a primary deficit of 9% in 2065 just as dependency ratios,
etc., really kick in. And so what we’re saying is we need a fundamental
solution that will stand the test of time. It can’t be gimmicks. It can’t be small tweaks around the edges. We need to be reframing the whole debate about
monetary policy and how much governments can spend. And sort of confronting directly some of the
misplaced arguments that have often been used to counter this type of proposal. G. Wilpert: Okay well we’ll probably come
back to you again once we see a little bit clearer as to which way the UK is heading
in this issue. But thanks so much Ed for having joined us
for today. E. Smythe: Thank you very much for having
me. I enjoyed it. G. Wilpert: I was speaking to Ed Smythe, economist
and researcher at the financial research organization Positive Money. Thank you for watching the Real News Network.