Friday, January 21, 2011

Options One and Two

I quoted Steve Keen yesterday:

Can we keep on borrowing our way to prosperity? Here’s where I turn cynic once more: we could, if we didn’t already have an unprecedented level of private debt

Absolutely: If we didn't already have all this debt, we could still use debt to grow the economy. But we do, so we can't. I see two possible solutions to this problem.

1. We reduce the accumulation of debt, so that we are again able to grow.

2. We find an alternative to using debt to grow the economy.

I'm in favor of both solutions. However, only the second is a long-term solution.

I like option one, because that stops the downward spiral. I see that as a necessary step. So I call for forgiveness, and printing money to pay off debt, and stuff like that. It's a quick way to reduce private-sector debt.

Massive global default would also work, but it would be disruptive. And it would be unfair to people who played by the existing rules. Some people seem to think it would be okay to do that. I think it is more important to change the rules.

Suppose we choose option one, and reduce the accumulation of debt. We reduce debt enough that the economy starts growing again, at a decent rate. We could do it in four years, if we use appropriate policy, or we could do it in four hundred, after another dark age. We can take matters into our own hands and fix things, or we can let the economy solve the problem at its own pace.

Say we do get the economy growing again. Some people will think the problem solved. But the problem isn't solved, because we didn't change the rules. If the economy is growing again, and we're using debt to grow, then debt is accumulating again. All we have to do is wait, and the problem will return.

Option two is a way to prevent the return of the problem. We prevent the return of the problem by limiting the accumulation of debt. We prevent the return by changing the rules to prevent the excessive accumulation of debt.

Now you may say that option two makes no sense, because we use debt for growth. And I would say, well yeah. I would say, take a step back and look at it again. Debt helps the economy grow, and then after a while it doesn't help anymore. This is the problem that must be dealt with.

But not in this post.

No comments: