I really liked the opening of the Cecchetti/Mohanty/Zampolli PDF:
Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster.
I liked the "two-edged sword" metaphor all the while I was writing yesterday's post. Soon as I finished, I had another thought.
Perhaps our troubles with debt arise from the ambiguity of the double-edge: Debt is good, and debt is bad. Perhaps if we only thought of debt as bad, we would stay out of trouble. Or if we only thought of debt as good, we'd never think ourselves in trouble.
Nah. It's good and bad, and we just have to deal with our confusion on the matter. Oh, there are explanations, sure. The PDF opens with one. From the Abstract:
At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging.
So: It's not the debt that gives us trouble, but the level of debt. Low levels of debt (or, moderate levels, as the bankmen say) are not problematic; but high levels of debt are a problem. I agree; my key phrase is "excessive debt".
But remember how it was when you were a kid? When you are little, everything is out of reach. When income is little, even "moderate" debt can be insurmountable.
Low and high, big and small: These are relative terms. That's how we get into trouble. We don't see the debt as too high until we're in trouble.
Then it is obvious. But then it is too late.
We need a better way to look at debt. "The double-edged sword" is a useless metaphor that does not keep us out of trouble. To make it right, we need an extra word: credit.
Debt is always bad. Credit is always good. But using credit creates debt!
Before you use it, OPM -- other people's money -- is credit. It is credit until you use it. But the moment you spend a borrowed dollar, all that's left is debt. You don't have the money anymore. After that, you just have the debt.
Debt is the record of credit we have put to use, a record of money borrowed and not yet paid back.
Credit is always good because it is available for use, or because you're using it, adding to aggregate demand, boosting the economy, keeping somebody working. It's all good.
Debt is always bad, because you don't have the money anymore. You don't have the credit anymore. You just have the obligation to pay back money you no longer have.
Let me revise the bit I quoted from the PDF: Debt is not a two-edged sword. Debt is one edge, perhaps the sharper edge. The other edge is credit-money.
The sword is finance. If you have to have a metaphor, the sword is finance.