Debt fetishism is bankrupt view

This is my latest Perspective column for Fund Strategy.

One of the most striking but least commented upon features of the economic malaise is the extent to which it is blamed on debt. Not just that the build-up of debt is part of the story – that much is obvious – but that it is the cause of the crisis.

Often contemporary debt problems are portrayed as part of a destructive cycle that goes back hundreds or even thousands of years. From this perspective the West’s current economic plight is merely a more sophisticated version of what has happened many times in the past.

The crisis may manifest itself in the economy but, from this viewpoint, it reflects a moral battle between creditors and debtors. Creditors want to maintain the value of money while debtors struggle to expand its supply. Proponents of this viewpoint see contemporary rows over quantitative easing as merely modern versions of age-old battles.

There are at least two conceptual problems with what could be called “debt fetishism” even leaving aside the political dead ends to which it can lead. First, it assumes that the build-up of excess debt is in itself the cause of the turmoil facing western economies. As a result it sweeps aside the possibility that the accumulation of debt could itself be a symptom of a more fundamental weaknesses.

Second, it is ahistorical. By focusing excessively on money itself it misses the broader social contexts in which debt operates. Money has existed for a long time but contemporary economies have distinct features that did not apply hundreds, let alone thousands, of years ago.

David Cameron is Britain’s most high profile debt fetishist. The prime minister’s views on the subject were clearly spelt out in a speech delivered to the Confederation of British Industry annual conference last November. As with most politicians he left a degree of ambiguity in his pronouncements. At times he appeared to put generating growth on a par with tackling debt.

However, the main thrust of his argument was that the crisis should be blamed on a build-up of debt. For example, he defined the current economic malaise as “a crisis of debt”. He also went on to argue that the markets’ lack of faith in the ability of eurozone countries to repay their debt is what lies behind the region’s crisis. As far as policy is concerned he went on to argue that “dealing with deficits must be line one of our plan for recovery”.

The problems with such statements is not that Cameron discusses debt, it is clearly part of the story, but his suggestion that it can be characterised as defining the problem. Such arguments fail to understand that high levels of debt themselves emerged in relation to more fundamental economic weaknesses.

The debt bubble that burst in 2008 was inflated by a combination of factors, including relatively low interest rates, relaxed bank lending rules and high public spending. These were in turn part of a government reaction to economic lethargy that involved extending credit in an attempt to avoid an economic slowdown. Underlying the crisis therefore was a lack of dynamism in the real economy. Focusing on the accumulation of debt means missing the bigger picture.

Debt fetishism is not confined to the Conservative party. Another prominent purveyor of this misleading view is David Graeber, an American anthropologist at the Goldsmiths, University of London, who has recently found fame with his book Debt: The First 5000 Years. He describes himself as an anarchist and the New York Times has said he “has a strong claim to being the house theorist of Occupy Wall Street.” Other high profile publications that have discussed his book favourably include Business Week, the Financial Times, the Frankfurter Allgemeine Zeiting and Time magazine.

Despite their differences, he shares with Cameron a fixation with debt and a blindness to the real world of production. As Greaber’s book title suggests he fails to understand debt in relation to the specific economic contexts in which it arises. He is happy to talk about ancient Babylon one minute and contemporary America the next. For him the similarities between such diverse societies tend to outweigh the differences.

For Graeber, as with Cameron, the solution to the current malaise lies with reducing or even eliminating debt. Whereas Cameron favours cuts in public spending, the anthropologist advocates a jubilee: a debt write-off discussed in biblical texts such as Leviticus and even implemented in pre-biblical times. For Graeber money is just “a bunch of promises” so writing debt off should in principle be relatively straightforward.

So both Cameron and Graeber, despite being viewed as representing opposite ends of the political spectrum, see resolving debt as central to overcoming the crisis. Their blindness to real economic forces means they both fail to see the need for a more fundamental restructuring. Cameron seems to believe that free enterprise will thrive once debt is reduced, while for Graeber debt is merely imaginary in the first place.

For those who want to follow this debate further the Buttonwood columnist of the Economist, Philip Coggan, has a new book out called Paper Promises. In true debt fetishist terms it evidently discusses the crisis as part of an age-old struggle between creditors and debtors.

Rejecting debt fetishism is a precondition for tackling the West’s economic problems successfully. Not only is it a misplaced set of ideas, in both its conservative and radical forms, but it also leads to policies that cannot help to solve the real challenges ahead. If anything it is likely to make matters worse as its supporters divert attention from the urgent task of rebuilding a dynamic economy.