Wednesday, January 18, 2012

The cause of the cause of the cause... of the problem


Krugman links to Understanding Eurozone debt developments by nation by Gianluca Cafiso at VOX. The paper provides a bit of history:

Debt-to-GDP ratios started to increase in Europe in 2008. This was when governments undertook measures in an effort to avoid things getting any worse – they put in place stimulus packages and rescued large financial institutions.

"Debt-to-GDP ratios started to increase ... when governments ... rescued large financial institutions."

So now, what was the cause of the problem? Not the government debt. Government debt is the result of the problem. The problem was the private debt that grew to its breaking point.

The problem was that private debt was allowed encouraged to grow to its breaking point.

The problem was the policy that encouraged growth of private debt.

The problem was the thinking that created that policy.

The problem was the flawed assumptions underlying that thinking: the assumption that credit-use is good for growth; and the assumption that if there is inflation it must be due to printing money and cannot be due to credit-use.

I cannot trace the problem back beyond this point.

2 comments:

Jazzbumpa said...

the assumption that if there is inflation it must be due to printing money and cannot be due to credit-use.

Stated in the inverse, but I believe you are still implying that credit use causes inflation.

We had a long, and ultimately fruitless conversation on this topic back in october.

http://jazzbumpa.blogspot.com/2011/10/does-debt-cause-inflation.html

If this is indeed something that you believe, that is central to your view, you need to demonstrate it.

You might have done this and I missed it. If so, I'd appreciate a link.

Cheers!
JzB

The Arthurian said...

Keen says it too:

A bank loan thus gives a borrower additional spending power without forcing savers to reduce their spending power to compensate.