Maybe an economist can explain it to me, but I don’t understand why massive amounts of debt and credit are a good thing. So people, businesses, and governments have more debt than they could ever conceivably repay, and government wants even more credit? Why?
Isn’t credit supposed to increase productivity? For example, a company needs a new machine. It could wait years to buy the new machine on its own resources, or it could take a loan, buy the machine immediately, boost production, and increase profit. However, this assumes there’s a market for the increased production.
How much of this new credit goes toward improving productivity and the economy, and how much is simply going to service existing (bad) debt? I’ve read we’re already up to over 300% of GDP in existing debt (public and private), but government wants to loosen credit even more???? It boggles the mind.
Even worse, the new credit is used in a carry trade where one country (e.g. Euro, then Asia/Australia, soon Canada) guarantees a strong currency and another (e.g. Japan, then U.S., now Euro) deliberately weakens theirs to spur credit-based consumption and exports. The world is ping-ponging between the various strong currency countries (lending at realistic interest rates) and the weak currency countries lending at unrealistically low rates. As they shift, the malinvestments they create unwind, sometimes rapidly (e.g. 2008) and cause enormous deleveraging that toasts the banks involved in the trades.
Some credit does.
If a manufacturer uses credit to buy a new new machine to increase productivity by more than the loan costs him, that's good.
If a person borrows money to buy a reliable car so they can get to work on a regular basis, increasing their income by more than the total-cost-of-ownership of the car, that's good.
If a person borrows money to buy a new car because they want a new car even though they've got a perfectly servicable car, that's not good.
If a person takes out a second mortgage, which they can't really afford, to take the kids to Disneyland, that's bad.
Karl Denninger at the Market Ticker periodically covers things like this very well
Credit that is made possible by fiat or via fractional reserve banking is a form of dilution of the value of the currency it is issued in. It is a form of theft by counterfeiting instruments that represent wealth.
Expansion of credit is the basis of the boom-bust business cycle.
see: Business Cycle Primer by Llewellyn H. Rockwell Jr.
Link: http://mises.org/daily/606
All good points. Credit is not per se a bad thing. Regulated by market forces, interest rates tend to make the system self regulating. They tend to balance long term investment vs short term spending. Not always. Markets by themselves produce bubbles. But the markets, historically, recover pretty quickly (after pain) when the government butts out.
Governments mess this up in at least three ways: (1) When the government becomes a huge debt creator (Obama, Pelosi and Reid); (2) When government policies distort interest rates and credit to achieve political goals (printing gobs of money, quantitative easing, Fannie Mae policies, Community Reinvestment Act—all designed to increase private debt by decreasing the cost and availability); and (3) When government distorts distributed risk decisions (FDIC removes constraints on banks to invest deposit monies wisely because customers know the government will make up for any losses).
Number 2 and 3 got us where we are. Numbers 1 and 2 are now being frantically employed to prevent the market from correcting the bubble. It won’t work. It will only make things worse. In the end, the bubble will burst and our kids will have 10 trillion dollars in debt to show for it.
If a business borrows too much money, the prices of its shares will drop-shareholders realize that the company may not generate the cash flow to service the debt. Unhappy shareholders means the possibility of a takeover etc.
So corporations have some restraints on too much borrowing.
Any entity, individual, business, or government that borrows continually to pay for day-to-day expenses is in trouble. If one borrows to build a factory,or dam etc that will general future cash flows to service the debt, then the use of debt and credit is fine.
Many businesses borrow because the timing of cash receipts differs from cash payments.
.....Maybe an economist can explain it to me,.....
I’m not an economist and don’t play one on TV but..... I think:
During the great depression, the powers that be insisted and got austerity. Tighten up. Hunker down.
The Keynesians led by Keynes were pissed that the could not get their desired policies of loose money, lots of money government spending implemented. FDR tried but not to the extent they considered necessary.
They have been waiting 60 years. They are now getting their chance.
In my view fail.
In my view the only solution is worldwide inflation to absorb all the debt