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Long live the debt

“Save in time then you have in need”, knows the vernacular. Private provision is based on this virtue. The same recipe, but in reverse order, supporters of a countercyclical economic policy recommend to the state: debt yourself in need, and when the need is over or the economy grows again, you can repay the debt. With this recipe you refer to theories of the economist John Maynard Keynes.

The first part of this recipe is currently being followed by all states to alleviate the hardship caused by the Corona epidemic in their economies. In Switzerland, for example, government debt is expected to rise by 30 to 60 billion Swiss francs in 2020 at the federal level alone, Finance Minister Ueli Maurer reckons. The US and EU countries are currently piling up even higher debts in order to provide financial support to companies and households. They have already done the same to cushion previous crises such as the 2008/09 financial crash.

Government debt grew faster than the economy

The second part of this countercyclical economic policy, on the other hand, debt repayment, is usually forgotten. This is shown by looking back. Even in years without need, most industrialized countries increased their national debt. They did this not to ease a recession, but to support the growth of the economy. Moreover, the debt of most industrialized countries grew more than their economies in the last 20 years. For a long time, the economy has only been growing on the pump. This is shown in the graph below on the share of public debt as measured by gross domestic product (GDP) in the period from 2000 to 2018.

Long live debt

The US, for example (blue curve) increased its national debt from 50 percent in 2000 to more than 100 percent of its GDP in 2018; the 2008 financial crash caused the most pronounced upward kink. Similarly, although somewhat less steep, public debt has increased in Europe since 2000 (see the orange curve of the Eurozone). There are significant differences in Europe depending on the country: while the debt ratio in the southern countries (Italy, Spain, Greece, etc.) has increased above average over the last 18 years, Germany has been able to slightly reduce its debt share in GDP in recent years, but in 2018 it also remained above the level in 2000 at 62 percent.

Since the turn of the millennium – and in some cases even earlier – public debt in the largest economies has grown much faster than their overall economic performance in terms of nominal GDP. “Nobody could have missed the fact that a significant part of the already relatively low economic growth of the last decades was only a kind of fake bloom, which only became possible through the financial capitalist debt orgy”, commented The German economics Professor Karl Georg Zinn 2009. Without public debt, the-seemingly thriving-economy in the USA and other Western industrialized countries would have shrunk for a long time.

Switzerland is one of the few countries that has reduced its debt ratio since the turn of the millennium – thanks to the federal debt brake from 2003 onwards. The (grey) Swiss curve in the graph above, like that of the US and the Eurozone, is based on IMF data; the official figures of the Swiss Federal Financial Administration (FFA), which defines government debt more narrowly, are on average around 13 percentage points lower for Switzerland.

Corona epidemic causes national debt to explode

In order to alleviate the corona-related economic crisis, the states are currently distributing additional amounts in trillions. The curves in the graph from 2018 to 2020 show that government deficits will thus rise even steeper than before. By the end of 2020, the International Monetary Fund (IMF) recently estimates that US public debt will rise to 131 percent of GDP, while that of the Eurozone will rise to 97 percent (see chart above). This means that in order to pay off their national debt, workers in Europe and the USA would have to work for free for a whole year or even longer with all their means of production. This is impossible and, according to some economists, not necessary (more on this later in this Text).

In Switzerland, too, the government debt ratio will increase significantly in 2020, by 8 percentage points to 48 percent of GDP (according to the IMF definition), according to the conservative estimate of the writer. This estimate is based on Parliament’s decisions earlier this month on additional federal spending and guarantees, as well as various forecasts on the contraction of GDP and tax payments in 2020.

In Nominal terms, the debt of all countries in the world currently totals around 70 trillion US dollars, or around 80 percent of global economic output (GDP global). If you add the private debt of households, companies and the financial sector, you come to almost four times the pure national debt.

More debt, more assets

More controversial than recording the amount is the question of whether and to what extent the growing national debt is a Problem. Some of the politicians and economists find it irresponsible that today’s Generation lives not only ecologically, but also financially on the Pump of later generations. The stronger the debt rises, and the more government and corporate bonds, including junk bonds, the more money - raising central banks such as the Fed in the US or the ECB in Europe buy, the more brutal the inevitable financial collapse will one day be.

Other Economists, among them also the info Sparrowhawk employees Werner Vontobel, assess the risks as low. Because the states would never have to pay back their debts, but could always replace expiring loans with new ones, they justify. Or their national or central banks could continue to increase the money supply forever, as they have in recent years; in contrast to the crisis in the 1930s, when the states triggered Inflation with their banknote presses, this has actually worked in recent years without major Inflation. In addition, every debtor is faced with a creditor.

In recent years, private assets have also grown with debt, especially in the form of shares and real estate. But this wealth is unequal and is distributed more and more unevenly. In Germany, for example, the wealth of all natural persons amounts to around 6.3 trillion euros.

Empires became richer - and relieved by the state

The effect of the unequal distribution of wealth was demonstrated when, from 16 March, economic activity was restricted by emergency law in order to slow down the spread of the Corona epidemic. As a result, many small businesses and employees got into liquidity problems. Although the German economy, measured by GDP, has grown by nearly 30 percent since the turn of the millennium, no financial reserves could be formed. The oligarchs, on the other hand, have doubled their wealth since 2000.

The rich did not only get richer because their income from Labour and capital as well as real estate and inheritance increased above average. At the same time, they benefited from falling taxes. This is shown by data on Switzerland, which the economist Hans Baumann collected and published last week in the trade union newspaper “Work” using the graphic below.

Long live debt

For example, the fiscal burden on taxpayers with an income of more than 500,000 Swiss francs in the city of Zurich has steadily decreased since 1980 from around 30 percent to 20 percent today; the situation is similar in other cantons. Since 1980, the tax burden on companies in Switzerland has fallen even more sharply, namely by half; this was particularly pronounced with the recent tax reform.

On the other hand, the crisis hits people with below-average incomes and assets particularly hard. Since the beginning of the Corona epidemic, companies in Germany have applied for short-time work for around a quarter of all employees. This gave them a wage reduction of 40 percent. Also the now again increasing unemployment affects poorer people more than rich people. Nevertheless, the policy refuses to link the support measures for companies with a dividend waiver. Thus, the state indirectly finances the owners of the companies with its guarantees for loans.

Who should pay for all this?

The growing national debt, which dampens the current economic crisis, will intensify the distribution struggle in the coming years. Leftists and, in some cases, Greens demand that the state must revive the economy with early investments and economic stimulus programs. This will further increase the national debt. And who should finance all this? “The additional funds must be demanded from those who have benefited from tax cuts in recent years, “says Hans Baumann, an economist close to the trade union, and demands:” with a special tax on high incomes, a tax on very high assets and a solidarity surcharge on corporate taxes.”

Bourgeois parties, on the other hand, will soon demand state austerity measures, which experience has shown to affect the poor more than the rich. At the same time, they are sticking to their plans for further tax cuts to ease the burden on the economy. The question remains: which side will prevail? As arbitrators in democracy, citizens decide at the latest at the next election.