A British investment
manager who predicted the 2007 credit crunch has warned that
Keynesian economic policies followed by governments are in danger of
deepening the global downturn.
David Kauders, an
investment manager, said the policy prescriptions derived from the
1930s no longer work. “Keynes was right at the time” said
Kauders, “but after 75 years of post-1945 application, the result –
rising interest payments by households and businesses –
now neuters any benefit.”
His new book The
Financial System Limit: Radical thoughts about money, shows that
total debt (including all forms of personal and business borrowing)
is now three times GDP (economic output) worldwide. Kauders estimates
that one-fifth of economic output is devoted to interest.
This neuters any
benefit from economic stimulus. Yet policy advice is now trying to
make the debt-saturated global economy even more indebted.
The pandemic has
brought about a behavioural change. People now want to save instead
of spend more.
Because all advanced
economies are dominated by consumption and services, when people
choose to spend less and save more their national economy shrinks.
Perfectly rational behaviour deepens the recession.
economists argue that interest is just a transfer payment from one
group of people to another. They overlook the ever-rising interest
payments that destroy those who have borrowed and make it harder to
The more debt that
businesses and households take on, the nearer we come to the
financial system limit. Cheap government borrowing is fine until it
is passed to businesses and households at much higher interest rates.
But Kauders, whose
book provides a radical new critique of dominant monetary and
economic policies, said the resulting additional borrowing could take
the world closer to its “financial system limit.”
This occurs when a
country’s total debt – comprising government borrowing as well as
corporate, banking and personal debt – becomes so large that the
majority of its resources are used to repay the loan and not for
Kauders also observes
that Modern Monetary Theory describes how governments manipulate the
financial and economic system, but makes no allowance for the rising
waste of interest payments. “MMT explains how the system works.
This does not make it right.”
projections are based on logic and thought rather than obsolescent
assumptions about how the world ought to work. He said: “A case
study of a defaulting country in the book, showed that default
occurred when 38% of economic output was spent on interest. The
pandemic has already pushed interest costs up and economic output
down. Few economists seem to appreciate the limits to interest cost.”
Financial System Limit
ISBN 9781907230776 is published by Sparkling Books as an e-book,
price USD 6.99. The book is non-technical, intended for all to read.
More information at
David Kauders FRSA is
an investment manager and also contributes occasional articles to the
UK financial press. His previous books are The Greatest Crash: How
contradictory policies are sinking the global economy (2011) and
Understanding Brexit Options: What future for Britain? (2016)
Press release distributed by Pressat on behalf of Sparkling Books Limited, on Monday 27 July, 2020. For more information subscribe and follow https://pressat.co.uk/