Sunday, April 15, 2012
To solve a problem in computer programming, you break the problem down into smaller parts and solve each part separately.
That technique works very well.
To solve the problem of debt, it seems to me, many people like to break the problem down into small parts and then say: Look! There is no big debt problem!
That technique doesn't work.
I'm pretty confident that finance grew because productive-sector profits were declining, making finance relatively more attractive. And I am fairly confident that financial costs are the primary contributor to declining productive-sector profits. Ouroboros. It becomes necessary to reduce the size of the financial sector so that the productive sector can grow. Irony.
But I distrust the notion of putting limits on finance. Sht runs downhill, and soon those limits will be on me. The US Congress is not wiser than the Roman Senate, nor less self-interested.
If we -- the nonfinancial sector -- use half as much credit, the financial sector will shrink. The easy way to use half as much credit, without hindering growth, is to pay off old debt. Continue with the new uses of credit that become spending and create growth, but accelerate the repayment of debt to reduce the total demand for credit.
I keep coming back to the question that if we just need credit for growth, then why do we need credit use at 350% of GDP? And I keep coming back to the observation that there is nothing natural about the size of the debt accumulation we have achieved. It must be a result of policy.
Yes, I want to achieve the same thing that can (presumably) be done by imposing limits on me. But my plan of attack is different, and my thinking goes all the way back to the rudimentary assumptions that underlie policy.
I want more fiat money in the economy to make up for the reduction of credit use. (That's the whole plan.) But the quantity of fiat money has been reduced (see: M1/NGDP) while our use of the more expensive credit-money has increased. The quantity of fiat money has been reduced because of our assumption that printing money causes inflation.
Meanwhile, our use of credit has increased -- leading to the bizarre accumulation of debt -- because of our assumption that credit use is good for growth. (See "irony".)
Posted by The Arthurian at 4:00 AM