Thursday, January 8, 2015

Gross Federal Debt

Graph #1: Gross Federal Debt (blue) and the Golden Age Trend (red)
The red line is an exponential curve based on the Federal debt of the Golden Age. Think of it as showing what the Federal debt would have been if we didn't grow the Federal debt since the 1970s in an effort to restore economic vigor.

People today say the growing Federal debt is a problem. It is important to remember that in the 1970s and '80s the growing Federal debt was a solution.

Federal debt growth failed as a solution because it didn't grow faster than private debt. That didn't happen because of all the "safety-net" stuff that postponed the crisis since the 1970s. Because we prevented economic collapse back then, we didn't get a private debt collapse back then, and private debt just kept getting bigger.

So private debt kept getting bigger, and since the 1970s when it became a problem, the Federal debt has been getting bigger in an effort to solve the problem. So now, both the private and the Federal debts are massively big. And apparently, there are two kinds of people in the world: those who complain about the size of the Federal debt, and those who do not complain about the size of Private debt.

There cannot be a good ending when all debt is massively big. But the only remaining option -- and the only one we have not tried -- is to reduce private debt. Policymakers refused to do that, and debtors could not (because policy undermined their efforts). So at last, the economy took up the challenge and gave us an economic crisis. And for a few years, private debt fell.

But this is not a thing we can leave to chance. We must learn that keeping private debt to a low level is a good thing; and policymakers must learn it also.

And policymakers must act.

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