Saturday, June 26, 2010

The Great Indebtedness

It is often said that our great indebtedness is the result of excessive spending, public and private. Arthurian economics denies that. The source of our great indebtedness is bad policy -- a policy that limits the growth of money, encourages the use of credit, allows and rewards the accumulation of debt.

The purpose of policy is to change economic conditions. Existing policy has changed economic conditions by creating a monetary imbalance. The solution to our economic problem is to change the bad policy. The solution is to improve policy by rewarding the accelerated repayment of debt. Little else need be done.

Tax policy to encourage the accelerated repayment of debt would induce consumers and businesses to make a few extra payments on existing debt, rather than spending those dollars at the mall, say, or on new business software. It would draw money out of circulation; it would return money to the banks; it would retire debt.

Drawing money out of circulation, it would serve as an inflation-fighting policy. It would serve the purpose that Federal Reserve policy serves at present. The Fed, of course, can remove money from circulation. But it cannot reduce your debt. The new Arthurian policy would fight inflation by reducing your debt.

Accelerated repayment of debt strikes at the source of money-creation and solves the problem simply, by encouraging the completion of credit transactions. Note that the economy is moving in this direction on its own, anyway. This is a sign of what needs to be done and what is the right thing to do.

Accelerated repayment of debt would free up the Fed to increase the growth of money. New Arthurian policy would not only permit that, but would make it a clear necessity. Repayment of debt draws down demand -- as we well know from the experience of the past two years -- and is deflationary. To counteract these downward pressures the Fed would find itself required not only to increase the quantity of money, but also to make more credit available at lower rates.

But the Fed's response would not be inflationary. It would simply counteract the deflationary pressures from the accelerated repayment of debt.

The goal of policy must be to reduce the level of existing debt while encouraging new uses of credit. That is not a zero-sum change. By discouraging the accumulation of existing debt, Arthurian policy reduces the debt burden and fights inflation. By encouraging new uses of credit, the policy encourages demand and growth.

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