The analysis is incomplete

JW Mason links to Seven unsustainable processes, again? (short PDF) which contains two quotes that caught my attention. First:

Godley (1999) pointed to seven unsustainable processes which could harm U.S. growth prospects. In our view, a longer, deeper crisis was averted in 2001, without addressing the underlying growth problems, so that the next (current!) crisis was more severe.

Sure, okay. And the rest of that thought, too:

It follows that if the remaining imbalances are not addressed by appropriate policy measures, resuming growth under the same demand patterns will imply further instability.

Yeah. Except for one thing. This pass-the-buck approach to dealing with the longer, deeper crisis does not go back only to 2001. It goes back at least to 1974.


Second:

Some commentators put the blame on monetary policy for keeping interest rates too low, and therefore allowing an ever increasing level of debt.

In our view, low interest rates helped defer the crisis.

Again, sure... Low interest rates DID help defer the crisis. And low interest rates did contribute to the expansion of debt, or at least, did nothing to slow it.

Low interest rates postponed the inevitable and made it worse -- exactly as the PDF posits in the first quote.

It seems to leave us between the rock and the hard place: Jack up interest rates and suffer the consequences now, or leave 'em low and suffer worse, later. But the analysis is incomplete.

I insist: The analysis is incomplete.

Our assumptions so thoroughly permeate our thinking that we fail to see what we're doing wrong. We think we need credit for growth. So we see nothing wrong with increasing our reliance on credit, and increasing it more. And then increasing it more.

And then increasing it more.

But we don't need credit for growth, not so much. Certainly we do not need a volume of credit equal to three and one-half times GDP. One-fifth of GDP is probably twice what we need for growth.

Thing is, we don't just use credit for growth. We use credit for everything. And we don't pay it off. We let it accumulate. We use credit like money and let debt accumulate. We make financial crisis inevitable.

But it's not like we had a choice. It's policy. We use credit for growth because policymakers think credit is good for growth. And they set that in stone.

Oh, and the other thing: They think printing money causes inflation. So the cheap money, interest-free money, there's almost none of it around. But there is plenty of expensive money in use, as evidenced by the size of private debt.

And when the expensive money contributes to inflation, policymakers further restrict the quantity of cheap money, and make the expensive money more expensive. What they ought to do is encourage more rapid repayment of existing debt, to fight inflation.