The Global Debt Bubble

I reprint this Bloomberg article in full because it lays out all the ways global policymakers have increased the risks of a global debt-driven correction, sometimes called a depression.

These policymakers have decided that since there is no shortage of global labor, there is little chance of cost-push inflation. But this ignores the very real effect of excess credit, which is the relative price changes reflected in real assets, such as land, real estate, and the control of Big Data. These assets are being more and more concentrated in fewer hands – it’s like a return to feudalism where a few lords owned all the productive assets and the laboring peasants were forced to work for subsistence living.

So, the real question is which comes first: a global financial collapse or a political revolution? Neither are smart risks for public policy and democratic governance.

My comments in bold red.

The Way Out for a World Economy Hooked On Debt? More Debt

By Enda Curran

December 1, 2019, 4:00 AM PST Updated on December 2, 2019, 12:12 AM PST

    • Cheap borrowing costs have sent global debt to another record
    • Options to revive economic growth require even more borrowing
    • Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman, and child on earth.

Global Debt

Much of that legacy stems from policymakers’ deliberate efforts to use borrowing to keep the global economy afloat in the wake of the financial crisis. Rock bottom interest rates in the years since has kept the burden manageable for most, allowing the debt mountain to keep growing.

Now, as policymakers grapple with the slowest growth since that era, a suite of options on how to revive their economies share a common denominator: yet more debt. From Green New Deals to Modern Monetary Theory, proponents of deficit spending argue central banks are exhausted and that massive fiscal spending is needed to yank companies and households out of their funk. [But we can’t ignore the fact that central banks are largely funding this deficit spending by buying bonds. If they can no longer expand their balance sheets, the private sector would have to buy this excess debt at much higher yields.]

Fiscal hawks argue such proposals will merely sow the seeds for more trouble. But the needle seems to be shifting on how much debt an economy can safely carry.

More than a decade after the financial crisis, the amount of combined global government, corporate and household debt has reached $250 trillion.

One solution proposed by policymakers? More debt

[Debt growth is an exponential function – thus as we increase debt, we have to increase it at an ever greater rate just to keep the game going.]

Central bankers and policymakers from European Central Bank President Christine Lagarde to the International Monetary Fund have been urging governments to do more, arguing it’s a good time to borrow for projects that will reap economic dividends.

“Previous conventional wisdom about advanced economy speed limits regarding debt to GDP ratios may be changing,” said Mark Sobel, a former U.S. Treasury and International Monetary Fund official. “Given lower interest bills and markets’ pent-up demand for safe assets, major advanced economies may well be able to sustain higher debt loads.”

Rising expectations of fiscal stimulus measures across the globe have contributed to a pick-up in bond yields, spurred by signs of a bottoming in the world’s economic slowdown. Ten-year Treasury yields climbed back above 1.80% Monday, while their Japanese counterparts edged up closer to zero.

A constraint for policymakers, though, is the legacy of past spending as pockets of credit stress litter the globe.

At the sovereign level, Argentina’s newly elected government has promised to renegotiate a record $56 billion credit line with the IMF, stoking memories of the nation’s economic collapse and debt default in 2001. Turkey, South Africa, and others have also had scares.


[The trend of total debt/GDP tells us whether are deficit spending is paying off. When it gets too high, most of our GDP will need to service existing debt loads. The more likely scenario is widespread defaults that ricochet through the global economy.]

As for corporate debt, American companies alone account for around 70% of this year’s total corporate defaults even amid a record economic expansion. And in China, companies defaulting in the onshore market are likely to hit a record next year, according to S&P Global Ratings.

So-called zombie companies — firms that are unable to cover debt servicing costs from operating profits over an extended period and have muted growth prospects — have risen to around 6% of non-financial listed shares in advanced economies, a multi-decade high, according to the Bank for International Settlements. That hurts both healthier competitors and productivity.

As for households, Australia and South Korea rank among the most indebted.

The debt drag is hanging over the next generation of workers too. In the U.S., students now owe $1.5 trillion and are struggling to pay it off.

Even if debt is cheap, it can be tough to escape once the load gets too heavy. While solid economic growth is the easiest way out, that isn’t always forthcoming. Instead, policymakers have to navigate balances and tradeoffs between austerity, financial repression where savers subsidize borrowers, or default and debt forgiveness.

“The best is to grow out of it gradually and consistently, and it is the solution to many but not all episodes of current indebtedness,” said Mohamed El-Erian, chief economic adviser to Allianz SE.

Gunning for Growth

Policymakers are plowing on in the hope of such an outcome. [Hope for the best? In the meantime, elites’ ability to manage a crisis of their own making is more secure.]

To shore up the U.S. recovery, the Federal Reserve lowered interest rates three times this year even as a tax cut funded fiscal stimulus sends the nation’s deficit toward 5% of GDP. Japan is mulling fresh spending while monetary policy remains ultra easy. And in what’s described as Britain’s most consequential election in decades, both major parties have promised a return to public spending levels last seen in the 1970s.

China is holding the line for now as it tries to keep a lid on debt, with a drip-feed of liquidity injections rather than all-out monetary easing. On the fiscal front, it has cut taxes and brought forward bond sale quotas, rather than resort to the spending binges seen in past cycles.

What Bloomberg’s Economists Say…

“When a slump does come, as surely it will, monetary policy won’t have all the answers — fiscal policy will contribute, but with limitations.”

— Bloomberg Economics Chief Economist Tom Orlik

As global investors get accustomed to a world deep in the red, they have repriced risk — which some argue is only inflating a bubble. Around $12 trillion of bonds have negative yields.

Anne Richards, CEO of Fidelity International, says negative bond yields are now of systemic concern.

“With central bank rates at their lowest levels and U.S. Treasuries at their richest valuations in 100 years, we appear to be close to bubble territory, but we don’t know how or when this bubble will burst.”

The IMF in October said lower yields are spurring investors such as insurance companies and pension funds “to invest in riskier and less liquid securities,” as they seek higher returns.

“Debt is not a problem as long as it is sustainable,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong, who previously worked for the European Central Bank and Bank of Spain. “The issue is whether the massive generation of debt since the global financial crisis is going to turn out to be profitable.”


Okay, so we know that public debt never gets paid back, just rolled over with new debt. The question, as Ms. Herrero says, is whether this debt leverage is productive or not; does it make our lives better in material and non-material terms; will it help us tackle non-monetary challenges like climate change?

Credit constraints are those that penalize unproductive investments in favor of productive ones before we know which is which. The elimination of credit constraints means we are just throwing money at the wall to see what sticks, and whoever gets those credits is largely arbitrary. The whole strategy is driving global inequality, so the question again is which comes first: financial collapse or political revolution?

Oh yeah, Merry Christmas!

Electoral College Confusion

I print this from The Atlantic in full because I think it lays out a convincing but misguided case in the Electoral College debate. I’ve included my response to The Atlantic below.

Five Common Misconceptions About the Electoral College

November 29, 2019

Two of the nation’s last three presidents won the presidency in the Electoral College, even though they lost the popular vote nationwide. In 2000, Al Gore outpolled George W. Bush by more than 540,000 votes but lost in the Electoral College, 271–266. Sixteen years later, Hillary Clinton tallied almost 3 million more votes than Donald Trump but lost decisively in the Electoral College, 306–232. And, as a recent New York Timespoll suggested, the 2020 election could very well again deliver the presidency to the loser of the popular vote.

Despite this, defenders of the Electoral College argue that it was created to combat majority tyranny and support federalism, and that it continues to serve those purposes. For example, Representative Dan Crenshaw of Texas, responding to Representative Alexandria Ocasio-Cortez’s recent criticism of the Electoral College, tweeted that “we live in a republic, which means 51% of the population doesn’t get to boss around the other 49%,” and that the Electoral College “promotes more equal regional representationand protects the interests of sparsely populated states.”

But arguments like these are flawed, misunderstanding the pertinent history. Below, I identify five common mistakes made in arguing for the preservation of the Electoral College.

Mistake Number 1: Many supporters of the Electoral College assume that the debate about presidential selection at the Constitutional Convention, like the debate today, focused on whether the president should be chosen by the Electoral College or by a nationwide popular vote.

But as tempting as it is to read history in the light of contemporary concerns, the debate at the convention focused on a different issue: Should Congress choose the president? Both the Virginia Plan and the New Jersey Plan, the two primary alternatives at the Convention, proposed that Congress select the president. This was unsurprising because in most states at the time, the legislature chose the governor. On June 1, the convention voted 8–2 that Congress should elect the president, and the delegates would affirm that decision on three other occasions.

The frequency with which the delegates revisited the issue reveals not their confidence but their dissatisfaction. Most delegates wanted the executive to check legislative usurpations and block unjust or unwise laws, but they feared that dependence on the legislature for election—and possible reelection—would compromise the executive’s independence. Some delegates hoped to avoid this danger by limiting the president to a single term, but as Gouverneur Morris of Pennsylvania observed, this could deprive the nation of a highly qualified executive, eliminate the hope of continuation in office as a spur to good behavior, and encourage the executive to “make hay while the sun shines.” James Madison added that election by the legislature would “agitate and divide the legislature so much that the public interest would materially suffer” and might invite the intervention of foreign powers seeking to influence the choice.  

The difficulty lay in finding an alternative to legislative selection, and the delegates considered and rejected various possibilities, including popular election. Ultimately, perhaps in desperation, they referred the issue to the Committee on Unfinished Parts. On September 4, less than two weeks before the convention ended, the committee proposed the Electoral College. Its proposal mirrored the states’ distribution of power in Congress; each state had as many electoral votes as it had members of Congress. But because the electors dispersed after voting for the president, the Electoral College did not threaten the independence of the executive. With only minor adjustments—most notably, the House replaced the Senate as the body that would select the president if a majority of electors failed to agree on a candidate—the convention endorsed the proposal.

The point of all this is, the Electoral College did not emerge because of opposition to popular election of the president.

Mistake Number 2: Another common belief is that the convention rejected popular election of the president because the delegates feared majority tyranny. People make this claim as though to say that because the Framers were skittish of a national popular election, so should we be today.

But, once again, this interpretation of history is wrong. The convention did twice reject popular election of the president. But the delegates who rejected it did not object to popular elections per se—they had no problem with popular election of the House of Representatives or state legislatures. Rather, they were skeptical of a national popular election, primarily for reasons that are no longer relevant today.

First, they feared that people would lack the information to make an informed choice as to who might be an appropriate candidate for the presidency or who might be the best choice among candidates. Thus George Mason of Virginia claimed, “It would be as unnatural to refer the choice of a proper candidate for chief Magistrate to the people, as it would be to refer a trial of colours to a blind man.”

But his reason was that “the extent of the Country renders it impossible that the people can have the requisite capacity to judge of the respective pretensions of the Candidates.” In such circumstances, he thought, voters would naturally gravitate to candidates from their own state. Delegates who favored popular election replied that “the increasing intercourse among the people of the states would render important characters less and less unknown,” and that “continental characters will multiply as we more or more coalesce,” reducing state parochialism. Today, with mass communication and interminable campaigns, lack of information is no longer a problem.

Second, some southern delegates feared that popular election of the president would disadvantage their states. James Madison noted that, given less restrictive voting laws, “the right of suffrage was much more diffusive in the Northern than the Southern states,” which would give them an advantage in a popular election. Beyond that, a popular vote would not count the disenfranchised enslaved population, reducing southern influence.

The Electoral College solved both those problems, awarding electoral votes based on a state’s population, not its electorate, and importing the three-fifths compromise into presidential elections. The effects were immediate and dramatic—in 1800 John Adams would have defeated Thomas Jefferson had only free persons been counted in awarding electoral votes. Obviously, these concerns no longer apply, although popular election would encourage states to increase their influence by expanding their electorate, while the Electoral College offers no such incentive.

Third, some small-state delegates opposed popular election because they feared that larger states, with their greater voting power, would dominate. Yet these same delegates also objected to the Electoral College, insisting it too gave excessive power to the large states. Their concerns were addressed by stipulating that should no candidate receive a majority of the electoral vote, the selection would devolve on the House of Representatives, with each state casting a single vote.

What is striking about the convention’s debate on popular election of the president is that its opponents did not claim it would encourage majority tyranny. Doubtless the delegates were aware of the danger of such a tyranny—Madison first presented his famous discussion of “majority faction” at the convention—but no delegate objected to popular election on that basis, and Madison himself supported popular election of the president.

Mistake Number 3: Similarly, some defenders of the Electoral College have argued that the delegates who favored the Electoral College opposed popular election of the president.

Given the current debate on presidential selection, this might seem obvious, but the deliberations at the convention were much more fluid. James Wilson of Pennsylvania first proposed popular election of the president, but when his motion failed, he immediately raised the possibility of a mediated popular election: electors chosen by the people who would select the executive. All the other leading advocates of popular election—Morris, Madison, and Alexander Hamilton—also supported the Electoral College, primarily as an alternative to congressional selection. In defending the Electoral College, Madison and Hamilton emphasized its popular character. Madison in “Federalist No. 39” noted that “the President is indirectly derived from the choice of the people,” and Hamilton in “Federalist No. 68” concurred: “The sense of the people should operate in the choice of the person to whom so important a trust was to be confided,” and reelection should depend on “the people themselves.”

Mistake Number 4: Many people also believe that the Electoral College was designed to preserve federalism and states’ rights.

The Constitution was, in James Madison’s words, “in strictness neither a national nor a federal Constitution, but a composition of both.” It empowered state legislatures to determine how the presidential electors were to be chosen, and if the Electoral College failed to select a president, the House of Representatives would, with each state casting a single vote. However, the debates during the Constitutional Convention make clear that the Electoral College was not intended to protect the states or enhance the influence of state governments and state perspectives.

The convention delegates sought to safeguard the independence of the national executive from state governments. They overwhelmingly rejected proposals that the executive be selected by state legislatures or by state governors. They also rejected a proposal that the president be removable upon request by a majority of state legislatures and did not even consider the New Jersey Plan’s provision that the president “be recalled by Congress when requested by the majority of executive of the states.” This was hardly surprising. Most delegates were sharply critical of state legislatures and wanted to ensure that the president had the independence necessary to oppose their schemes. Madison summarized the prevailing sentiment: “The President is to act for the people, not the States.”

Although the Electoral College allowed state legislatures to determine how electors would be chosen, it was expected that once selected, the electors would operate independently of their state governments. The constitutional ban on senators serving as electors and the choice of the House to resolve deadlocks in the Electoral College ensured that those selected by (and perhaps influenced by) state legislatures would not play a role in selecting the president. Beyond that, the delegates expected that the electors’ deliberations would remain secret, that they would be free to choose the candidates they believed most qualified, and that their votes would be tabulated and transmitted to the president of the Senate without any indication as to who voted for which candidate, so that no political retribution could be exacted. The Constitution’s requirement that electors vote for two candidates, at least one of whom was not from their state, served to reduce state parochialism and encourage a national perspective.

In sum, the Electoral College was not designed to promote federalism—Martin Diamond, one of the most thoughtful proponents of the Electoral College, accurately described the design as “an anti-states-rights device, a way of keeping the election from state politicians and giving it to the people.” The core protections of federalism, today as in the past, are the vitality of state governments, the division of powers between nation and state, and representation in Congress along state lines. The replacement of the Electoral College by a nationwide popular vote would threaten none of these. Voting procedures would remain the same, the only difference being that votes would be tabulated nationwide rather than state by state.

Mistake Number 5: And finally, perhaps the most widely believed and, at the same time, most incorrect of the arguments for the Electoral College is that it has vindicated the hopes and expectations of its creators.

To begin with, to some extent those expectations were unclear. For example, after the Electoral College was proposed, some delegates claimed that in most elections—George Mason predicted “nineteen times in twenty”—no candidate would get a majority of the electoral votes, and so the House of Representatives would elect the president. This of course would compromise the independence of the executive, and both Madison and Hamilton unsuccessfully proposed that the House’s role be eliminated, with the candidate winning a plurality of the electoral vote becoming president. Other delegates expected that a majority of the electors would coalesce around a single candidate. In “Federalist No. 39,” Madison presumed that “the eventual election” would be made by the House, but this was mere speculation and quickly disproved.

Even when the delegates’ hopes and expectations were clear, constitutional amendments have altered the operation of the Electoral College. The Twelfth Amendment, adopted after the contested election of 1800, requires electors to specify for whom they are voting for president and vice president. The Twentieth Amendment, by shifting the date congressional terms begin to January 3, ensures that the newly elected House of Representatives, rather than the previous House, would elect the president if no candidate received an electoral-vote majority. And the Twenty-Third Amendment extends the right to vote in presidential elections to U.S. citizens residing in the District of Columbia, awarding the District three electoral votes, though the Electoral College continues to deny American citizens living in Puerto Rico and other U.S. territories any role in choosing the president.

Even more important have been changes in political practice. In “Federalist No. 64,” John Jay maintained that the Electoral College “will in general be composed of the most enlightened and respectable citizens,” and in “Federalist No. 68,” Alexander Hamilton described the electors as “most likely to possess the information and discernment” necessary to choose the chief executive. But by 1800 political parties had developed, and elector discretion was replaced by elector commitment to the parties’ candidates. Today many states do not even bother to list the electors’ names on the ballot. Interestingly, Hamilton and Madison as party leaders played a crucial role in this transformation.

The Constitution authorized state legislatures to determine how electors were to be selected, but by 1828 every state but South Carolina chose its electors by popular vote, and today all states do. Moreover, despite the initial expectation that electors would be chosen in districts, by 1836 party competition had promoted a winner-take-all allocation of electors in all the states. (Maine and Nebraska have since bucked that trend.) This in turn has affected presidential campaigns, as more and more candidates target their speeches, campaign appearances, and ads at “swing states” and largely ignore states they confidently expect to carry or to lose.

Meanwhile, the proliferation of primary elections, the nationalization of the choice of presidential candidates, the move toward candidate-based campaigns, and the reduced importance of state party organizations have fundamentally transformed presidential selection, without changing how votes are awarded under the Electoral College.

In “Federalist No. 68,” Alexander Hamilton contended that the Electoral College would frustrate “the desire in foreign powers to gain an improper ascendant in our councils.” It would also “afford a moral certainty that the office of President [would] seldom fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications.” In addition, it would keep from the office candidates with “talents for low intrigue, and the little arts of popularity.” In evaluating the Electoral College today, one must judge whether Hamilton’s hopes have been vindicated.

My response:

In his article, “Five Common Misconceptions About the Electoral College,” (The Atlantic, Nov. 29, 2019), Alan Tarr presents arguments against what he perceives to be the primary assumptions in support of the Electoral College system. These five “common misconceptions” are explained well but largely skirt the arguments applied to our current politics.

The Founders converged on the Electoral College in order to address the problems of the new United States of America, but in so doing they attempted to anticipate the dynamics of political conflict within a union of sovereign states representing a diverse and pluralistic population scattered across a large land mass. It is the logic of these dynamics that matters to today’s debate, not the original application to a scenario rooted in history.

Mr. Tarr dispels the comments of Rep. Crenshaw as a misunderstanding of history, but of course his words are perfectly accurate in describing the issue today. We do not adhere to a simple majoritarian system when choosing national leaders and the electoral system does help balance regional and demographic interests.

As far as the historical record is concerned, only five times in fifty-eight presidential elections has the EC tally not confirmed the national popular vote tally–that’s over a 90% rate of coincidence—and the fact that two of the aberrant cases have occurred in the past 20 years likely indicates something different and untoward about our current political divisions. An honest analysis of the 2016 election reveals that the EC corrected for a seriously skewed national popular vote.

In this light, Mr. Tarr’s evident “mistakes” are really mistakes of interpretation largely irrelevant to our current debate. But Mr. Tarr does make some assertions that are relevant and arguably flawed. He claims that with “mass communication…lack of information is no longer a problem.” One look at a major news aggregator such as RealClearPolitics or social media quickly dispels this misplaced confidence. As a political scientist, Mr. Tarr surely knows that the only true threat to democracy is systemically biased information, which is why media is the first target of despots and dictators. Fake news seems to be the byproduct of the information age.

The true political dilemma we face today is a large country divided politically according to population density: we have blue cities and inner suburbs vs. red exurbs and rural counties. Population density does suggest many diverging economic and policy interests and have so over the long history of our republic, but today’s divide is reinforced and amplified by party platforms and media interests. Democrats have targeted urban voters and Republicans have targeted non-urban voters. Both parties have focused on partisan identity politics.

Our major news media is largely located in urban areas, because that’s where their audiences are concentrated. The digital disruption of media means media has had to provoke, entertain, and serve the interests of their audiences as a matter of survival. Hence they have turned to infotainment and politics demanded by their audiences, which suggests a strong news bias towards urban politics. (The fact that most critiques of the EC are published by urban news organizations reveals this bias against our long-standing democratic institutions.)

Mr. Tarr then dismisses the most crucial implication of a national popular vote, which is not states’ rights, but the rights of the residents of those states over the direction of the union to which they belong. Due to the highly skewed geographic distribution of partisan voting, large concentrated populations would be favored by campaigns and policy platforms, because that’s where the winning votes would reside. These interests run counter to large swaths of the country outside of metro areas. How long before less populated states tired of taxation without representation? Thus, the true threat to the United States is the weakening and possible dissolution of the union. As political secession is not an anachronism in the world today, dismissing this threat as implausible would be the gamble of a fool.

The residents of small states do not dominate national elections, and likewise a few large urban states should also not dominate national elections. Neither can without joining broader coalitions. Without the EC that forced compromise would not be necessary for a few large states. And so it turns on swing states, but swing state voters should be applauded for their bipartisan fluidity, while states’ voters that are stuck in partisan identity should be encouraged to open their hearts and minds to the same spirit of bipartisanship. That’s democratic politics as it is meant to be managed.

And this gets back to what we believe were the hopes and expectations of our Constitutional Founders. It seems obvious from Washington to Lincoln to Roosevelt to Trump that the primary objective of our electoral system is a strong, coherent, stable United States in defense of its constitutional principles of liberty and justice. Stated in another way, our system of democracy is not designed to make voters happy—since roughly half the voters will be unhappy after every election—but to perpetuate the exceptional experiment of American democracy.

We are not France.