Gotta say it (Part 2)

Andrew Haldane (of the Bank of England) says: "What we face today may be called a debt overhang, but what it will feel like is a debt hangover. Like a hangover, it will slow activity in the period ahead."

So Mr. Haldane says excessive debt hurts economic growth. This is a very important point. But let's not call it "debt." For now, let's call it "credit use."

When we have little debt, credit use helps the economy grow. But then, credit use creates debt. And as you know, policy allows debt to accumulate. As debt accumulates, we get closer to the Laffer limit. We get closer to the point where continuing to do the same thing begins to have the opposite effect.

As we approach the limit, we start to lose the advantages of credit use. Economic growth becomes disappointing. Once we reach the Laffer limit, using credit to grow the economy begins to do more harm than good.

That's when we start talking about "debt" again.

Our leaders tweak the system: deregulating, creating incentives for savers, cutting taxes to stimulate growth. And we continue to rely on credit use. And credit use continues to create debt. And we continue to accumulate debt.

We are soon well beyond the Laffer limit. At that point not even magic can make the economy grow like it did in the good old days. Among the excerpts from Haldane on Agrawal's blog is this simple explanation of the effects of excessive debt:

Debt operates rather like a tax. Debt servicing costs, like a tax, reduce the disposable income of the borrower. Too much debt means a higher debt “tax” and a greater drag on activity – lower lending by banks and spending by households and companies.

Or as I said, just this morning:

New uses of credit help the economy grow. That's good. Old accumulations of debt create a cost that hinders economic growth. That's bad.

Not even magic can solve the problem. But the problem is not the new uses of credit. The problem is old accumulations of debt. And there's an easy fix for that.