All that remains

Recently I said:

If debt was low again, really low, we would have money left over after paying the bills. No one would have to be demanding wage increases or raising prices.

To continue that thought: In the low-debt, low-financial-cost economy, people would have more income available to spend, and business would have more available for profits. I know, they say business profits are high already. But they're talking about a few big businesses, like Apple and Google. I'm talking about Mom-and-Pop shops. The ones you see on the local news every so often, going out of business, where the proprietor is crying on camera.

In the low-debt economy, the mom-and-pops would be doing better. Moms and dads and families would be doing better. Big businesses would probably be doing better, too.

But it's not magic. We need low debt to get costs down for people and for businesses. But we need something more as well: We need something to make people "feel" that the economy is better, to make people feel that things are good again. We need something like winning the second World War or putting covid behind us. But covid didn't work, did it.

Winning WWII gave people a jolt. People had jobs. People had money to spend. The jolt got the economy going. Then things were good for 20 years or more. The economy was good for 20 years or more.

Putting covid behind us gave us just one good year:

Graph #1: Annual Rate of Real GDP Growth, 1980-2021

2021 was the best year for GDP growth since Reagan's "Morning in America".

So maybe this leaves a lot to be desired. GDP is not the most satisfactory measure. And because of increasing inequality, the people who most need a good economy get the least benefit from it. And anyway, 2022 sucks, I know. I know.

But what happened? Why didn't the jolt work?

Well, it tried to work, but we still have too much debt. Too much financial cost. So instead of getting great growth, this time we got inflation. We got cost-push inflation. Prices went up because businesses were trying to cover their costs. But we will never cover our costs as long as the cost of finance keeps rising.

These days, people say there's no such thing as cost-push inflation. They say it, because if the money isn't there -- if the spending isn't there -- then you won't get the inflation. 

Yeah, but you won't get growth, either, if the spending isn't there. The economy just slows more. And there is still the "cost-push" to deal with: Cost pressure, arising from the cost of finance. 

And since finance continues to grow, the cost of finance continues to rise, and the cost pressure is unrelenting. And things get worse.

 

I don't like the term cost-push. The "cost-push inflation" concept implies that you cannot have cost-push pressures if you don't have inflation. But that is wrong. So I just talk about "cost pressure". Cost pressure can be relieved by inflation. But that is not the best plan, because inflation does not solve the cost pressure problem. Inflation is only a way to cope with the cost pressure problem, even as that problem continues to grow worse. That's what the "two percent target" was, a way to get a little growth by allowing a little inflation. Not the best solution.

To solve the cost pressure problem, we must first discover what creates the cost pressure.

Growing financial cost creates the cost pressure.

To solve the cost pressure problem caused by the growth of finance, we must first discover what is causing the growth of finance.

Economic policy promotes the growth of finance.

To solve the problem created by economic policy, we must make sure policymakers understand that the chain of causality begins with them. A lot of people think government is running the economy into the ground on purpose. I don't see it that way. I don't see how that could be. I think they just don't know how to fix the problem. But even if it is on purpose, we can probably get them to see that the cost of finance is a problem, not a solution.

Economic policy promotes the growth of finance, and has done so since the end of the second World War. At some point along the way, finance became too big and costly for our economy. We could no longer afford it. That's when things started to go wrong.

We could probably argue for the rest of our lives about when things started going wrong. That wouldn't be productive. We need to start replacing money-that-costs-interest with money-that-does-not-cost-interest. We have to reduce the cost of interest, but we still need enough money that the economy can function.

We can keep doing that, gradually, for a while. And we should start thinking about what level of debt would best promote economic growth. And thinking about proportions: how much of the total debt should be owed by government, and how much should be owed by the private sector. If we can fine-tune these two adjustments, the level and the proportions, we can make our economy unimaginably good. Unimaginably good.

Remember, borrowing money and spending it is good for growth, but paying the interest and repaying the principal are bad for growth. But there will be some level of debt and some balance between government share and private-sector share of debt that best promote price stability and economic growth.

To solve the problem created by economic policy, we must make policymakers understand the problem. All that remains is to convince them.