Private Debt Conundrum

One of the key and largely overlooked reasons for expected decline in our economy is burden of private debt, which is the combination of business debt and household debt. Even though government debt grabs all the headlines, private debt is larger than government debt, and has a greater impact on economic outcomes. Simply because the government is able to achieve deficit spending and private businesses and households are unable to the same. Further, private debt is a beneficial and an essential part of the economy, collectively contributing to the GDP.

Unfortunately, Covid – 19 has struck our country at a time private debt has grown disproportionately to private income levels.

Due to the Covid-19 lockdown, unemployment has skyrocketed and most businesses are closed. The central bank, instead of waiving off interest payments of all household and business loans, has decided to postpone them. This will create a future of escalating expenses with very less income or no income for households and private businesses.

All these coordinated efforts increase indebtedness of masses of people pushing them further in to high debt. Private debt will rise at alarming rate causing the consumption to decline.

Massive amounts of earnings goes to debt servicing leaving the people very little to consume or to invest. As a society, expenditure of one person creates an income of another. In other words, declining consumption creates declining income for the society which leads to lack of effective demand. Massive private debt levels have already started deflating our economy which was evident by undesirable GDP numbers.

Most pundits expect businesses to resume their operations automatically at pre Covid levels. However, due to enforced lockdowns, businesses and households have lost most of their liquidity and without liquidity there is no turnaround.

Most businesses and households are under loan stress now since it is only couple of months away from resuming loan repayments including differed payments. Without the intervention of the central bank, we are about to witness the wealth transfer of the century from masses of people to few wealthy bankers. Valuable asserts of people will get extracted to banks at depressed prices leaving balance liability on the shoulders of borrowers.

If we are to think of an economic recovery, government deficit spending must lead the way, hence, deficit spending becomes an income for the rest of the economy.

Sovereign governments are not like households or businesses when it comes to money. While we are told all the time prudent governments balance their budgets, just like households and businesses do, the analogy is false. Government is the currency issuers, not the currency user. If the government acts like households and businesses, trying to balance their budget, the economy would suffer, especially at this point of time. With counter-cyclical spending and pro- cyclical taxes, the budget of the government acts as a powerful automatic stabilizer.

  By

  Gayantha Dehiwatte

  Entrepreneur and Socialist Advocate