Sunday, January 31, 2010

Something old, something new, something borrowed...

There's a commonly used phrase -- debt and deficits -- that is sometimes a source of confusion. But there is a simple difference between "debt" and "deficit." A deficit represents new borrowing. Debt is the total amount of borrowing accumulated and not yet repaid.

"Debt" is old debt. "Deficit" is new debt. That's the significant difference.

But I don't care about the phrase "debt and deficits." Everybody else has talked that to death. I want to focus on the descriptive words new and old. New debt is a use of credit that boosts economic activity in the current year. Old debt is a measure of the hangover from credit-use. It burdens economic activity every year thereafter, until it is paid off.

If a new use of credit is yin, then the resulting debt is yang. If a new use of credit is a bonus for economic growth, the resulting debt is a penalty. New debt is not the problem. Failure to repay debt is the problem. Debt management is the problem.

The little graph shows the annual addition to "credit market debt outstanding" as a portion of the total. The addition is almost never more than ten percent of total. 90% of our debt is old debt. If we want to cut debt, there's plenty of old debt to cut.

If we want to reduce the size of the finance industry, we can cut old debt.

Every problem is an opportunity. For any number of reasons, we want to reduce debt.
Well, we are in luck. There is plenty of debt to reduce. Plenty of opportunity. We just need to abandon debt accumulation as a policy, and adopt a policy of debt repayment in its place.

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