So E poses the question: What would happen if everyone started paying off their consumer debt all at once?
Would inflation happen? Nope. The amount of money isn't increasing, only the what the money is being used for.
Would a recession happen? You betcha. Consumer spending would decline steeply, and quickly. Not only would credit card financed consumer spending stop, but so then the money used to pay off the debt would also exit the consumer spending realm. We'd see a decrease in demand across the board for nearly everything leading to a dropoff in output and employment.
But that would be the short term pain. The long term gain is that banks would be flush with capital they would need to lend, and they'd have to find a productive way to lend it, rather then lending it for consumer spending at high interest rates. It is likely you would see the beginning of a boom cycle as access to capital would open to all kinds of companies and entrepreneurs. This would of course lead to more jobs, more income and more spending.
Also, in the long run, as people became debt free, they would be able to put a higher percent of their income towards purchasing, helping create demand for all those new companies. Right now plenty of income is being spent on paying interest on consumer debt - not actually purchasing goods.
To summarize, banks lending capital for consumer purchases does little to increase our means of production, and in the long run, saps the purchasing power of the consumer. Eliminating consumer debt would cause a short term disruption in the economy, but would lead to a long term economic boom.
If the elimination of debt is, in the long run, a distinct positive, and the short term discomfort would not be disastrous, why not just cancel all the debt? I owe money, GM owes money, Fannie May owes money, the grand old US of A owes money, so let's just all agree that everybody owes everybody and call it even. Let's get the G4 and the World Bank at the table and just wash it away. Who loses in this scenario? Even China makes out as the increased spending power of the debt free invigorates their export markets. If you feel better using the term "moratorium" rather than "forgiveness," that's all good. The debt can still exist on paper with the bilateral understanding that it will never be repaid.
ReplyDeletei think the issue with debt forgiveness, while it would be awesome, would be that lenders would be afraid to lend again, no matter how much they were assured that was the only time we'd do it.
ReplyDeleteits not that far removed from blowing a load in a girl, only then assuring her it won't happen again. chances are she's not going to want you to stick it in her again at least for a while, no matter how much you reassure her.
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ReplyDeleteWhat a colorful analogy. Sure, the chick might not let you in the front, but there are a host of other options in the meantime. Similarly, while the flow of credit might slow to a trickle, it would eventually graduate back to current levels. Also, with less capital headed to making interest payments or chipping away at principal, less credit would be necessary to fill the breadbasket. As with every pragmatic concept, this idea is antithetical to the status quo. Thus, the established methodology will always argue against it. Boo!
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