Monday, January 5, 2015

"Reductions in the growth of private debt have been associated with every recession for the last 50 years."


It is one thing to say, as Auburn Parks says, that "every recession for the last 50 years" has been associated with "reduction in the growth of private debt".

But that is not the same as saying every reduction in the growth of private debt creates a recession (which is what Auburn seems to want to say).

I can accept implicitly that when there is a recession, the use of credit will fall. But I do not accept the assumption that whenever the use of credit falls, recession is certain.

And even if it is true that there was a recession every time credit-use fell in the last 50 years, it does not mean the economy has to work that way. All it means is that policy has set things up to work that way.

And if it is true that policy set things up to work that way, then the real problem is the thinking that underlies policy. The real problem is the flawed assumptions that underlie policy.

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To summarize the thought: Reduction in the growth of private debt need not be associated with recession. You want to keep that in mind when you think about the design of policy.

3 comments:

jim said...

Art wrote "And even if it is true that there was a recession every time credit-use fell in the last 50 years, it does not mean the economy has to work that way. All it means is that policy has set things up to work that way."

If by "policy" you mean a commitment to having a capitalist market economy then that statement may be true.

But you are going to have to convince voters to abandon an economy based on capital and open markets for that to change. In a market economy private sector Debt is used as a tool for acquiring wealth. Both the lender and borrower stand to get richer by prudent debt contracts. That's why the financial sector is the sector that owes the most money to others. Their wealth comes from borrowing.

The accumulation of debt means there is a equal accumulation of savings. Whatever the policy you think will force a reduction in debt will also force a reduction in savings and that is not likely to be very popular with those with savings. The thing about savings is the more you threaten to take them away the more determined people are to not spend them.

Oilfield Trash said...

Art

I think I can agree with this statement

"To summarize the thought: Reduction in the growth of private debt need not be associated with recession. You want to keep that in mind when you think about the design of policy."

You can reduce the growth of debt to zero but not change the amount of debt in the system. $100 of debt repaid, $100 of new debt change in debt 0, but you get $100 dollars of spending and maybe no recession since it does not reduce spending levels for good and or services.

Please correct me but this does not seem to be your argument.

As I understand it you want a reduction in the amount of debt, $100 dollar of debt repaid $0 new debt change in debt -$100 growth -$100 reduction in spending -$100.

This would seem to support the argument that a reduction in the level of debt will bring some level of recession since it reduces spending for goods and/or services.



The Arthurian said...

Oilfield: "... but this does not seem to be your argument."

You are right, that is not my argument.

Apologies for the delay in responding. It seems my thoughts are not as clear on this as I thought they were. I'll have to get back to you.