Krugman, The Opinion Pages, 12 December 2010:
The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.
|SOURCE: CONTRAHOUR AT SEEKING ALPHA|
Too much politics in Krugman, and too short a timeline of debt growth.
And it's not just the debt of families. It's all debt. But the biggest, fastest increase was in financial sector debt which came out of nowhere and took the lead. That's where the crisis hit the fan, by the way: finance.
Moving on. Comment #88 on Krugman's article (the third comment here) opens thus:
It seems to me that if the problem is lack of demand because household debt is too high and households are going through a process of deleveraging, that we should not try to fix the problem by adding to the debt of our highly indebted public sector.
Comment #88 strikes me as a very popular view, but also quite confused. I applaud the commenter's explicit identification of debt -- household debt here, public sector debt there. Indeed, most people just call it debt, which makes the whole thing a jumble with no solution.
I've done the same, myself. So I know that being explicit about whose debt is whose is very useful. If people were not all so caught up in debt-as-a-bad-bad-thing, it would be easy to see that Comment #88 is quite confused:
We don't want to try to fix the problem of household debt by adding to public debt.
But why not? Is it because public debt is unrelated to household debt, so that adding to public debt is an irrelevant solution?
Is it because public debt is related to household debt, in some way that makes adding to public debt harmful to the household debt problem?
Those are the only choices: unrelated, or related.
Still, public and household debt could be related in some way that makes adding to public debt beneficial to the household debt problem. People just naturally assume that's not the case, because debt-is-a-bad-bad-thing.
I'm not so sure.
To borrow an opening from Comment #88: It seems to me that if the problem is lack of demand because household debt is too high and households are going through a process of deleveraging, that we should fix the problem by reducing household debt as a matter of policy.
The Arthurian solution is not to increase public-sector debt, but to reduce private-sector debt. I don't know why nobody else has picked up on this: Everybody says the problem was created by excessive debt in the private sector. And everybody says private-sector debt must fall before the economy can recover. But nobody says we should use policy to help reduce existing debt.
Policy is still all the other way: We need to get everybody using more credit, because that's what makes the economy grow.
Well, yeah. But the accumulation of debt that results from that strategy is the thing that inhibits growth. So if we cut in half the existing private-sector debt, the private sector will be prepared to grow again. And then it may be time to say we need to get everybody using more credit again.