Debt and Policy

• MENU: How Debt Works
  • Part 1: How Debt Works
  • Part 2: Debt and Policy
  • Part 3: Debt and Fiat Money

Policymakers understand that we need credit for growth. So their policies encourage credit-use.

And if economic growth turns out to be less that they want, policymakers encourage more credit-use. But if it is true that debt can be a drag on growth, the policymakers' plan presents a problem: Their policies can end up undermining growth.

The problem in a nutshell is that our understanding of the economy remains incomplete. And so our policy is incomplete. When some unknown factor (the excessive accumulation of private-sector debt) hinders growth, policymakers respond by encouraging ever greater use of credit. Credit-use snowballs up.

Then, since we have no policy to encourage accelerated repayment of debt, debt accumulates. And because the accumulation has been hindering growth, policymakers have been all the more vigorous in establishing policies that promote credit-use and the accumulation of debt. Ultimately, the accumulation had to turn cruel and unusual.


The problem is not that we use credit. The problem is that we let debt accumulate.

Yes, we need to use credit for growth. But we don't have the sense to fight inflation by getting debt paid off quickly. Instead, our anti-inflation policy limits the amount of non-credit money in the economy, which -- good grief! -- is the reason it's such a struggle to get the debt paid off.

The policy mistake is so dumb it would be funny, if it didn't cause such problems.