I Hereby Resolve...

"How to get out of debt in '10"

That's the page-one teaser in my local paper: Get out of debt. Story, page 32.

From page 32:

Get your financial house in order

It may be difficult, but it's not that complicated. Much of it is what our grandparents taught us. Don't owe a lot of money. Don't buy what you can't afford. Put something aside for a rainy day.

After the year the economy's had, no doubt many people are making resolutions to get their own finances in order.

And really, who could blame them?


Everybody wants to save more. It's human nature. We just work harder at it when the economy gets into trouble. Unfortunately, working harder makes the trouble worse. (I refer you to the PIMCO article, for example, and Krugman, and Krugman again.)

A year ago in the Twelve Pages, I wrote:

We cannot wait to see how far the economy falls. Every inch it falls will take yards and yards of government spending to gain it back.

Well we've waited a year, now. And there's lots of yap about how things are getting better. Yeah, well, that's good. I hope it's the truth. I hope it's not just an attempt to create an improved economy by talking things up.

I don't make predictions. But in the Twelve Pages I proposed a four-step plan to improve the economy:

1. Gradually increase the Reserve Requirement.
2. Increase the quantity of M1 money.
3. Continue to make credit available at low interest rates.
4. Create tax incentives to accelerate the repayment of debt.

Well, they didn't increase the reserve requirement, but they did start paying interest on reserves, and that accomplished the same thing. And they did increase the quantity of M1 money. And they are keeping interest rates low.

But we still don't have tax incentives to accelerate the repayment of debt. So the government got three right, out of four. But you know, that four-step plan was not offered as solution for the economic crisis. It was offered as a way to correct the bad policies that inevitably lead to economic crisis.

I've since come up with a solution for the crisis itself. It's kinda funny: My solution is to reduce debt. Funny, because that is everybody's solution. That's where this post started, too, with the newspaper article.

Our central bankers are among those who know debt is the problem. Their solution was to create a bunch of new money and use it to buy up some of the bad debt and isolate it. Protect the economy from it.

Maybe they prevented economic collapse. Probably they did. But they left us up to our eyeballs in debt. Their solution is not my solution.

My solution is to create a bunch of new money and use it to pay off debt. Cancel debt. Make it go away. Pay off 5 or ten thousand dollars of debt for every person in America. Make the debt go away. Everybody says the economy will stay in the doldrums until we've whittled debt down. Okay, but why are we whittling with a pen knife? Get out the chain saw. The bulldozer. The Debth Star.


Hey, the first Krugman link has a "debt deflation" link to a "London Banker" blog post that quotes Irving Fisher. Two more guys who know debt is the problem: Fisher, and that blogger. The London Banker quotes Fisher's summary:

In summary, we find that: (1) economic changes include steady trends and unsteady occasional disturbances which act as starters for cyclical oscillations of innumerable kinds; (2) among the many occasional disturbances, are new opportunities to invest, especially because of new inventions; (3) these, with other causes, sometimes conspire to lead to a great volume of over-indebtedness; (4) this in turn, leads to attempts to liquidate; (5) these, in turn, lead (unless counteracted by reflation) to falling prices or a swelling dollar; (6) the dollar may swell faster than the number of dollars owed shrinks; (7) in that case, liquidation does not really liquidate but actually aggravates the debts, and the depression grows worse instead of better, as indicated by all nine factors; (8) the ways out are either laissez faire (bankruptcy) or scientific medication (reflation), and reflation might just as well have been applied in the first place.

That's too many steps for my taste, but then Fisher was probably a lot smarter than me. Anyhow, we only need to get 4 or 5 steps into it, to see where it's going. From the top:

1. The economy changes.
2. There are investment opportunities.
3. There is over-indebtedness.
4. Problems result from over-indebtedness.
5. Problems result from the Step-4 problems.
6. Etc.

Okay, let's look at it.

1. The economy changes.

Yep. And nothing can be done to prevent it.

2. There are investment opportunities.

Yep. And most people think that's a good thing. I'm not gonna argue against it.

3. There is over-indebtedness.

Ahh -- Here's where the problem arises. Step 4 is problems. If problems result from over-indebtedness, then over-indebtedness is the problem that must be solved. You could try to back further up the list, and claim the investment opportunities cause the over-indebtedness; but that's not what Fisher says.

So we're stuck at over-indebtedness (Fisher's term), or excessive reliance on credit (my phrase), or debt (everybody's four-letter word).


So, the debt. So what's the problem? Like the newspaper says: Don't owe a lot of money. Don't buy what you can't afford. Put something aside for a rainy day.

Yeah, that'll work. That, and making it a New Year's Resolution. Because people have been struggling to reduce debt since Ross Perot ran for President. Since Reagan. Since before Reagan. And the problem only got worse.

There is a whole industry in this country dedicated to helping people get out of debt. But the debt problem only got worse. It got worse and worse, until we had the credit crisis, the Paulson panic of September '08. And maybe it's still getting worse.

But making a New Year's Resolution, that'll fix the problem. Yeah, right. Unless we get stuck in the doldrums for 10 or 15 years, like Japan. Like we did in the 1930s. But then every year we can renew our vow to reduce our debt. Maybe that'll help.

Or maybe, we should change economic policy. Now there's a thought!

We could wipe out a big chunk of debt by paying it off with newly printed money. Help out a lot of people who owe money. And at the same time help out the lenders, who get their money back.

And if using credit creates money and contributes to inflation, then paying off debt destroys money and is not inflationary -- even it we use newly printed money to pay off that debt. How 'bout that?

And after we wipe out that big chunk of debt, if that sets the economy on the road to recovery, then we need to finish the four-step plan: Congress must pass tax incentives to accelerate the repayment of debt.

Accelerated repayment of debt will reduce debt, reduce the growth of debt, reduce the accumulation. One simple change in the tax code will accomplish something everybody wants.

At the same time -- as if by magic -- the accelerated repayment of debt will drain money out of circulation and move it back into the banks. So it will fight inflation, and it will strengthen banks against failure.

It isn't magic, of course. It is only an attempt to complete some unfinished transactions. To repay some outstanding loans. The policy drains money out of circulation -- and thus fights inflation -- by reversing the process that put credit-money into circulation in the first place. A simple and obvious solution.

If we don't do this, if we don't establish a policy to accelerate the repayment of debt, we will never solve the problem. For we have many policies that encourage spending, that encourage borrowing, and that encourage the growth of credit-availability and the growth of credit-use. But we have no policy to accelerate the repayment of debt.

We have no policy to prevent debt accumulation.

Your choice: Make a New Year's Resolution to reduce your debt. Or, resolve to support a new policy -- tax incentives to accelerate the repayment of debt.

Or, what the heck. Do both.