David Kauders argues that our debt-based financial system is at ‘end of life’ and a different system needs to evolve.
Investment manager David Kauders says in his latest book, The Financial System Limit ‒ The World’s Real Debt Burden, that debt, public and private, cannot expand to infinity and the actions of central banks to stimulate the economy are creating a bigger private sector debt problem, which will cause a future deep recession.
Kauders’ controversial but rational ideas are based on troubling insights, including:
“The cost of private sector interest is now depressing economic prosperity,” David Kauders said. “The financial system limit of any society is the debt level at which repayment ceases to be viable. Prior to the pandemic, I estimated the average interest cost of all types of debt was then around 7%. However, world debt was three times annual world economic output. This shows the waste of paying debt interest.
“Total debt is key, taking into account corporate plus banking system and personal debt. Government debt is only around a quarter of total debt, so the focus on government debt is missing the point. Business and personal debt repayment has a real cost because inflation is so low.”
Kauders also draws attention to the fact that interest rates paid by most borrowers have been rising steadily even while interest rates offered to depositors and interest rates paid by governments have collapsed to near-zero.
“This shouldn’t be the case. It is caused by:
“These forces are deflationary, but there is no such thing as good deflation,” he said. “No economic multiplier can create more economic growth above the extra cost of interest on artificially created credit.”
In The Financial System Limit, Kauders refers to two case studies: the default by Puerto Rico’s government in 2016 and the collapse of the UK Carillion group in 2018.
“Both had reached their own financial system limit. When there is too much debt to service, positive real interest rates cause the debt overhang to act as a brake.”
Kauders believes that most countries, including Australia, are facing deflation with the world in a debt trap, made worse by the pandemic. Attempts to create inflation have little effect and the cause of this lack of inflation is the financial system limit.
“The authorities do not admit to the debt trap. The farce is that their policies worsen it. The right way of looking at debt is to measure interest cost on total debt in relation to economic output.
“Economists, academics, financiers and politicians need to grasp the concept of the financial system limit.”
Kauders warns that Keynesian economic policies followed by governments have outlived their usefulness and are in danger of deepening the global downturn. In addition, academic theory such as Modern Monetary Theory, capital flow analysis such as Piketty’s Capital in the Twenty-First Century and repeated demands for sound money, all ignore total debt and focus narrowly on government debt.
As there is no other obvious alternative to create prosperity, the financial system invented by separating debit and credit is approaching end of life.
The Financial System Limit ‒ The World’s Real Debt Burden, is available from global online bookstores. It is published by Sparkling Books and has an RRP of $A8.75 (e-book, ISBN 9781907230776) and $A20 (paperback, ISBN 9781907230783, printed in Australia). The book is non-technical and will appeal to anyone interested in money and the economy. Hardcover editions will be available later in 2021.
About David Kauders
David Kauders FRSA was educated at Cambridge and Cranfield School of Management. He is the author of The Greatest Crash: How contradictory policies are sinking the global economy. The Financial Times said in its review: “Radical thinkers might have a point”. His new book, The Financial System Limit ‒ The World’s Real Debt Burden, shows that creating more private sector debt eventually leads to economic decline.
“The author provides a historical view of how we reached the point where the level of global debt is unsustainable and now compounded by a global pandemic. The book is understandable by those without a deep financial background.
“Kauders, who has decades of experience as an investment manager makes the case for the difficult situation we, as global citizens, are confronted with.” ‒ LibraryThing reviewer
“The book pleas to measure interest cost on total debt in relation to economic output. A deep recession and consequential financial upset were inevitable in a world that could not resolve the conflict between stimulus and austerity, a world that remained addicted to debt, a world that refused to admit the limit to the growth of debt caused by the cost of servicing it. That’s what David Kauders wants to highlight.” ‒ Hank van der Klis, Netherlands
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