Saturday, July 7, 2012

Something old, something new

1. The problem is excessive private sector debt.

2. Bloomberg: EU Approves Jobs, Growth Plan With 10 Billion-Euro EIB Boost:
European Union leaders approved a 120 billion-euro ($149 billion) plan to promote growth in the 27-nation bloc that includes a capital boost for the European Investment Bank.

The government chiefs agreed on a 10 billion-euro capital increase for the EIB today as a centerpiece of the long-term growth plan...

“The growth agenda is a sign of our unrelenting commitment,” EU President Herman Van Rompuy said in a press conference in Brussels...

The Luxembourg-based EIB could use its capital infusion to increase its lending capacity by 60 billion euros and unlock 180 billion euros of additional investment, according to EU estimates.

With the extra capacity, the EIB can keep expanding its efforts to finance EU infrastructure projects. In January, the bank said it was on course to gradually return to pre-2008 lending levels...

Hoyer said the extra 180 billion euros in investments would take place between 2013 and 2015 if the EIB gets the extra capital, in an interview published today in Les Echos. Over the next three to four years, the EIB could make additional loans...

3. Yes, growth depends on the use of credit. But we already have lots of credit in use. We call it "debt". And it does not help us grow. Only *new* uses of credit help us grow. Old, existing debt is the counterbalancing hindrance to growth. We have so much old debt now that the new uses of credit have to be very very big or they are not effective. Thus we see massive Federal deficits and little economic recovery.

4. What we should have done for the 60 years before the crisis is the same that we must do when at last our economy recovers: We must use credit for growth, for that 3% or 4% or 5% of GDP increase we hope to achieve each year. Clearly, this kind of growth does not require debt to be 350% of GDP. 20% should be plenty. 50%, if we want to have a lot of financial assets.

5. The cause of the problem is excessive private sector debt. The solution is to reduce that debt. Until we reduce private debt, there can be no solution.

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