We rely on credit for growth, and think accumulating debt doesn't matter

Antonio Fatas says "details matter". He's right, but some of his details are not relevant.

Item 2 from his "non-exhaustive list":

Not all debt is bad. Two obvious points here. First, as much as we like to criticize financial markets for their excesses, we cannot forget that financial development is key to economic development.

"Financial development is key to economic development."  The policymakers' motto. That motto -- that thinking -- is the problem. Especially when you combine it with the second point Fatas makes:

Second, one cannot forget that the world has no (net) debt. For every liability there is an asset.

In sum: 1. We need credit for growth, and 2. Accumulating debt is not a problem.

Oh Antonio, you said it so well! This combination of ideas is at the absolute dead center of our economic troubles. We think we need credit for growth, and we think that the resulting accumulation of debt does not matter. It is a recipe for disaster.


Fatas says "the world has no (net) debt." Is that supposed to mean debt has no cost? Saying the world has no net debt is like saying the world has no net wage cost. Both statements are irrelevant. It doesn't even matter if they are true.


If you take all the cost of debt and all the income from debt for everybody in the whole economy and add it all up, you still only have a microeconomic quantity.

Debt has macroeconomic costs. If labor share gains on capital share, or falls behind, we have an economic problem. We have a similar problem when financial share gains on non-financial share, either for income or for wealth.

This graph shows "percent change from year ago" values for Real GDP (blue) and for TCMDO, a broad measure of accumulated debt (red). Blue is a measure of income:

Graph #1

I put some "average growth rate" lines on RGDP, and added two "debt event" arrows:

Graph #2: Debt grows gradually, then falls suddenly. Thereafter, income is lower.

Notice the sequence: After a debt event, the average growth rate of Real GDP goes down. After a debt event, the standard of living declines. After a debt event, wealth is more concentrated, more locked away than before. After a debt event, we're one step closer to the fall of civilization.

After a while, we get used to living at the new, lower standard of living. And then the repeating pattern of "debt growth" followed by "debt event" starts again.