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Looking Beyond the Debt Accumulation : A Critical Assessment of the Causal Mechanisms behind a Global Debt Crisis

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Title: Looking Beyond the Debt Accumulation : A Critical Assessment of the Causal Mechanisms behind a Global Debt Crisis
Author(s): Suvikas, Saska
Contributor: University of Helsinki, Faculty of Social Sciences
Degree program: Master's Programme in Global Politics and Communication
Specialisation: Global Political Economy
Language: English
Acceptance year: 2022
This thesis aims to offer a critical analysis of the phenomenon of a global debt crisis and possible mechanisms that may cause them. It starts with a hypothesis that the concept of a global debt crisis is too vaguely defined and relies too much on the idea of excessive debt being the root cause of the crisis. Instead, the thesis will argue that a global debt crisis must have a systemic nature where the crisis threatens the existence of the entire global monetary system. For the purposes of the argument, the different interpretations of debt are examined, the relevant features of our global monetary system are determined, and a systemic crisis theory of Jürgen Habermas is utilized. The thesis has its theoretical background in Critical Realism, which will help distinguish social mechanisms with real causal powers that may contribute to forming a global debt crisis. The thesis uses abductive and retroductive reasoning to assess different mechanisms brought forward in the relevant literature of whether they are capable and necessary to cause a global debt crisis. Furthermore, the thesis will approach the debt from the perspective of Modern Monetary Theory (MMT), which emphasizes the state’s role in managing money and debt relations. Specifically, the thesis will apply the frameworks of sectoral balances and monetary sovereignty to determine the differences of the global debt network in contrast to sovereign or private debt. Based on these frameworks, the argument is that the same mechanisms cannot cause a global debt crisis as a sovereign debt crisis. In the analysis part, the thesis focuses on two possible mechanisms that frequently appear in the academic literature as a cause for a global debt crisis: global imbalances and global debt deflation. The case for global imbalances relies on the fears of the U.S. dollar collapsing, which the frameworks of MMT indicate to be highly implausible due to the total U.S. monetary sovereignty. On the other hand, the case for global debt deflation rests on an increasing accumulation of private debt, which is shown to be more dangerous globally. However, despite its sound systemic causal mechanism, the assessment finds that global debt deflation is alone an insufficient cause to create a global debt crisis. In conclusion, the thesis emphasizes the role and significance of political decisions as a necessary cause behind most debt crises, especially a possible global one. The relevance of debt-controlling institutions are considered briefly, but the ultimate responsibility for preventing a global debt crisis is put into the hands of currency-issuing states. Political decisions will be shown to function as both a capable and necessary cause for a global crisis. Furthermore, the thesis also considers the limitations of using MMT to examine global debt relations and gives preliminary suggestions for further research.
Keyword(s): Debt crisis Global debt Global monetary system Debt Deflation Modern Monetary Theory

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