Policy forced our hand

From yesterday's 4 o'clock post:

Anyway the problem is not that we're idiots who just couldn't resist borrowing. Policy forced our hand. Policymakers thought it would be good if we got all choked up with debt.

According to the new Fisher Dynamics paper by Mason and Jayadev, the increase in household debt since 1980 is due entirely to lower inflation and higher real interest rates, and to reduced growth:

...important financial changes beginning around 1980 have been in contributing to household debt, independent of any changes in household behavior. Specifically, if average rates of growth, inflation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s.

"If average rates of growth, inflation and interest remained the same..."

But lower inflation was not an accident of policy. It was the plan. And increasing real interest rates was the method by which that plan was accomplished. As Josh Hendrickson put it:

Put succinctly, the Taylor principle refers to the idea in which the central bank raises the nominal interest rate more than one-for-one with realized inflation. In other words, the central bank increases the real interest in response to higher realized inflation.

Reducing inflation was the plan. Raising real interest rates was the method. And reduced growth was the tradeoff, the opportunity cost of reducing inflation.

If Mason and Jayadev are right, the increase in household debt since 1980 is entirely due to anti-inflation policy.

And of course, our pro-growth policy has always been to encourage the use of credit.