Debt is an asset. And debt is a liability. If I owe you money, for you it's an asset; for me, a liability. But it's important to remember where the problem arises. When debt becomes a problem, it is because the liability became a problem. If the payments take too much of my income, it's a problem.
When debt as liability becomes a problem, debt as asset becomes a problem: If I can't pay you the income you're planning on, it's a problem for you, too.
The simple and obvious solution is to make sure debt never gets big. That way, if debt ever does become a problem, at least it's not a big problem. But maybe that's too simple. Nobody seems to think it's a good idea. Everybody seems to think we should maximize debt right up to the absolute limit and then maybe just a little more, to see if we're there yet.
And then we have a problem.
An increase in debt -- or a new use of credit; it's the same thing -- an increase in debt creates a "boost" for the economy because it is extra money put into the spending stream. Paying down the loan creates a "drag" for the economy because money is taken out of the spending stream.
As a rule, though, the accumulation of debt increases from year to year. There's an increase in debt every year. As a rule. Crisis creates an exception to that rule, but in a normal economy debt increases every year. If I borrowed 80 last year and pay it back this year, but also borrow 100 this year, then there was a net increase of debt. And that creates a boost to the economy.
To see the boost we only look at the increase in debt. Not the total debt.
So I want to look at what we gain by borrowing money. I want to look at the boost and ignore the drag. And -- oh, but the interest. We do have to pay the interest on all that debt we're ignoring. That cuts into our boosted spending.
New borrowing is a boost, and interest payments are a drag, and we'll otherwise just ignore debt for now. I put that on a graph:
|Graph #1: Annual Increase in Total Debt (blue) versus Total Interest Paid (red)|
The next graph counts new borrowing as a plus and interest costs as a negative. It shows the difference. When the blue line goes below zero, interest takes more money out of the economy than new borrowing puts in:
|Graph #2: Money that New Lending Added to the Economy minus Money Paid as Interest|
The obvious exception occurs between 2002 and 2006, where the blue line rose to a sharp peak. New borrowing for that brief time was increasing at such a rapid pace that it managed to produce a net gain for the economy.
And yes, we're still paying for it today.