Thursday, March 15, 2012

Private Debt 2012 (11): The Economy Is Transaction

No matter what happens in the economy, it happens with money, or it happens for money, or both. So the cost of money is an absolutely crucial element of economic performance. If the cost of money is too high, it interferes with everything.

No, not just the interest rate. The interest rate is the cost of credit. The cost of money is the cost that arises from applying the interest rate once for every dollar of existing debt. In an economy with lots of debt, the cost of money must necessarily be high, no matter the rate of interest.

In an economy that cannot grow because "interest rates are at the zero bound" and cannot go lower, one can reduce the cost of money only by reducing the reliance on credit. By paying down debt. Or cancelling debt. Or somehow getting rid of debt.

When the crisis hit, the Federal debt (red) was 10% of Total (TCMDO) debt
Oh, and it's private debt that must be reduced.

No comments: