Adapted
When there is too much debt, it is necessary to reduce debt. In an environment where everything is growing, it is possible to reduce debt simply by having debt grow more slowly. This is what happened in the 1980s, after about 1986.
When there is not too much debt, the economy is able to grow with vigor. This is what happened in the 1990s. The economy grew faster. And debt started growing faster again.
When debt grows, it accumulates. The cost of debt, the interest and the principal, increases. Eventually, the cost becomes too much, and the economy cannot grow. This is what happened in the 2000s.
Debt growth is always higher than real economic growth, except at the very end.
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2 comments:
Would you agree that there is a cost to the Macro economy for both spending and not spending? You write a lot on the cost of spending(mainly debt), but unless I missed it not much on what it cost not to spend.
Hey, O.T.
As I like to say: The economy is spending. If we're not spending, there is no economy. Or, there is no monetary economy, at least. And since things are measured in dollars, no monetary economy means no economy.
A drop-off in aggregate demand would certainly affect GDP, but I wouldn't call that a "cost".
Maybe the "cost of not spending" that you are thinking of is like "the cost of holding money" that David Glasner was talking about.
But the cost of holding money is an opportunity cost, not an actual cost. We use opportunity cost when we think about what we should do or maybe what we have done. But, despite Glasner's apparent confusion, we do not make payments against opportunity costs the way we make payments against interest costs. So I say there is no actual cost, no actual expenditure that arises from holding rather than spending money.
Maybe the cost you are thinking of is inflation-related: If I wait now, and spend later, I will have to pay more if the price goes up. Or, an example from Jim: If I buy a thing now while it is offered at a sale price, and use credit for the purchase, the cost may be less than if I wait until I can pay cash and the sale is over.
Certainly those things are true. But I don't think of them in isolation. I think of them in an economy where the total amount of interest cost is 8.5% of GDP or less (1960 and before). I think of them in an economy where the total cost of interest is 20% or more (1979 and after, except when interest rates are extremely low).
In a high-interest-cost environment, the cost of using money is generally high. In a low-interest-cost environment, the cost of using money is generally low. (Interest cost is not the same as the interest rate.)
In an economy where most of the money we use is credit, most of our spending will include payment for interest. In such an economy, most of our money might have been better spent paying down our debt. But policy places limits on the increase of our income (to fight inflation), or so I am told. And policy encourages the use of credit.
Until policy stops encouraging the use of credit, and starts encouraging repayment of debt, the biggest and most problematic cost in our economy will be the cost of finance.
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