THE G20 summit held recently in Bengaluru, India ended in controversy. ‘Burdened’ by the travails of a world in conflict and economic collapse, the Group of Twenty failed to develop consensus on a narrative surrounding Russia’s invasion of Ukraine. This prevarication perhaps overshadowed a very significant development — the IMF’s call to consider debt restructuring for countries on the brink of default.

Despite the ubiquity of debt in modern economic discourse, the origins of this crisis and its ramifications lie shrouded in mystery. The IMF’s call for attention to debt restructuring thus offers an excellent avenue to trace the impact of the modern debt crisis and how it has restructured global and national economies.

The fundamental premise underlying the present debt crisis is the generation of debt and its utilisation. As Michael Hudson expounds in The Bubble and Beyond, classical economic thinkers differentiated between usurious and productive capital. Adam Smith castigated money lenders for generating income from money. Marx called usurious capital “fictitious capital”. This sobriquet stemmed from his belief that usurious capital had no basis in the productive economy, and instead, served as a constraint on the productive capacities of economies.

For Marx, the inexorable pull of industrial growth would result in usurious capital falling under the ambit of industry, resulting in an unprecedented productive boom in the transient capitalist epoch. Oddly, mainstream economic thinking would latch onto this view, claiming that savings and loans generated by banks would be used for capital formation and industrial investment. Open any standard macroeconomics textbook, and you will see the equation S (savings) equals I (investment) staring back at you.

As the economy slows, debt levels do not mitigate.

Reality, unfortunately, has played out differently. Predatory lending continues to dominate financial markets, and this is where we need to focus to highlight the rise in debt and its fallout. Hudson againpaves the path for us. As his seminal work highlights, most bank lending today is not geared towards capital or industrial investment. Instead, banks generate debt to propel even further debt, giving birth to an interminable cycle of debt.

This occurs on several levels. Banks loan to corporations predominantly to shore up stock prices through buy-back options, mergers, predatory takeovers and asset acquisition including real estate. Similarly, individuals garner personal debt to gain an education, buy a car or own a house. Most modern banking therefore, omits the ‘productive’ capital generation that thinkers like Marx imagined, and instead, remains predicated on avenues that enhance the overall level of debt in societies.

This results in two concurrent phenomena. On the one hand, economies fall victim to ‘debt deflation’, a scenario where increasingly large amounts of personal and corporate income are set aside for debt repayment. This acts to suppress both demand and supply since firms and individuals do not possess the disposable income to spend on goods and services. Modern American and Pakistani households serve as an example. As the economy slows and productivity falls, debt levels do not mitigate. The economy thus falls further into the abyss, resulting in downturns.

The other outcome is what Hudson calls “asset inflation” — rising asset prices owing to a glut of capital and loans. Artificially escalated real estate prices, bubbles in housing markets all stem from asset inflation, which makes home and land ownership even more evasive for average households. Think about the mushrooming of housing societies in Pakistan and the inability of most Pakistanis to now own or construct a house.

All of this holds dangerous consequences for societies. As debt deflation strangles the economy, states lose access to basic taxation and revenue. More ominously, certain segments come to dominate policymaking and work to eschew taxation in certain sectors. Think again of real estate and land in Pakistan. Elite capture, thus, lies at the heart of this system. In fact, any comprehensive analysis of elite capture — a term frequently highlighted on these pages recently — must scrutinise the cryptic workings of finance capitalism.

Falling productivity levels, dwindling public reserves through falling taxation and rising living costs through asset inflation result in an outcome where individuals struggle to make ends meet, while states fail to provide essential services owing to their debt woes.

The IMF hinting at debt restructuring at the G20 summit thus affords interesting opportunities. The history of the Fund and its ethos, however, dampens hopes. What this leads to and whether the Global South truly benefits is something only time will reveal.

The writer is a civil servant and studied at Cornell University and the University of Oxford.

Published in Dawn, March 4th, 2023