Questions from Aaron

Recent email from my son Aaron:
What should individuals do to reduce the 'credit per dollar' numbers you're talking about? I think you've laid out what govt. could do to help... So perhaps some practical guidelines would be good for the simple folks... (something about 'ask not what your country can do for you...').

How does one calculate their own 'credit per dollar'? Or for a business?

Is there one 'number' that we could come up with to compare individuals or businesses (or countries or what not) as far as this measurement goes? Or locate where this problem is growing the fastest? Or compare yourself to the average? Is this done already?



My reply:

> What should individuals do...?

There are lots of people and businesses and churches offering advice on how to get out of debt. But the problem only grows worse.

I am (apparently) the ONLY person who thinks our excessive reliance on credit is due not to individual behavior, but to ECONOMIC POLICY.

I (alone) am not talking about how people, or government, should be more frugal and cut back and eliminate waste. I am saying that policymakers misunderstand the cause of inflation, and as a result of this misunderstanding they have established bad policies and pursued them far too long.

(Actually, the policies were not always bad. But as a result of policy, the economy changed. And after it changed, a different policy was needed.)

How does an individual help? That is like asking: How does an individual change economic policy? The only answer I have for that is, you have to understand that policy is the source of the problem. When enough people understand, the problem will go away.

(Beating a dead horse.) Meanwhile, as long as policy-makers fail to understand that RESTRICTING the quantity of spending money while ENCOURAGING spending is a policy whose useful life has passed, they will continue to cause sluggish growth and "structural" inflation.


> How does one calculate their own 'credit per dollar'?

What I look at is total debt, divided by M1, where M1 is the total quantity of money-in-circulation (as opposed to money-in-savings, which is not being spent and which is not being used to pay off debt and stuff).

For an individual I suppose you could look at...
not INCOME, because you might receive the same dollar many times over the course of a year...
Imagine that we could "stop" the economy, and let everybody count up their "spending money" -- the coins and paper money in their pockets and wallets and pocket-books, and under the cushions of their couch, and also the money in their checking accounts. If we count that all up and add it together, that is M1 money. Spending-money.

Now, Aaron, estimate your share of THAT number for yourself and divide the total debt YOU owe by YOUR share of M1 money. Waddaya get? Do it on a good day, payday. Your debt-per-dollar will be quite high, I expect.

And just remember that on payday, when your personal M1 goes up, your employer's personal M1 goes down. So your "good" day is somebody else's "bad" day. So, figure it for your best day, and figure it for your worst day, and take an average.

> Is there one 'number' that we could come up with to compare individuals or
> businesses (or countries or what not) as far as this measurement goes? Or
> locate where this problem is growing the fastest? Or compare yourself to
> the average? Is this done already?

Because it is a POLICY problem, the only comparison that makes sense to me is country-to-country. (And because economics -- as Adam Smith knew -- is about the wealth of NATIONS.)

But this is not a bad idea. To compare a slow-growing nation to a fast-growing nation, or compare the U.S. now to the U.S. in the 1950s and 60s, or in the 1800s say.

If I am right about what's wrong, then China (say) will have a much LOWER debt-per-dollar number than the U.S. On the other hand Japan probably has a very high debt-per-dollar. I never looked at those numbers but... (I bet I'm right).

My DPD graph for U.S. data shows debt rising to a peak in 1933, then falling during during a Roosevelt-era "recovery," and rising since, almost without interruption. Comparing the 1950s and '60s on that graph to the 1970s and '80s -- and comparing the pre-Depression buildup with the post-recovery buildup -- these numbers are the basis of my view.


Before I had a chance to post the above remarks, I ran across a bit of evidence. In a recent post on GDP growth in Japan, Jake of EconomPic writes:

The issue with any recovery in real only terms is that the country's debt (and there is a ton in Japan) remains in nominal terms....

There's a ton of debt in Japan. (Of course there is. It's excessive debt that holds back recovery.) If I find any more evidence on DPD elsewhere, I'll post it in comments here.