Tuesday, October 11, 2011

Recovery largely rests on Debt Relief

No, not government debt, but private household debt. The enormous run-up in private debt that both contributed to the housing bubble and was an effect of the housing bubble is now holding us back from recovery. Households are trying to pay down debt through 'saving' more of their income, but in the aggregate are unable to because of unemployment and the 'paradox of thrift'.

In order for consumers to pick up spending again, they first need an income, and they second need reduced debts. Since the debt run-up was largely fraudulent (on both sides but I hold the creditors more culpable because of their understanding that the loans wouldn't be paid back and that the gov't would subsequently bail them out) I am in favor of some form of debt-forgiveness.

If we do not forgive large amounts of household debt, our recovery may never come. Job creation relies on sales which rely on consumer spending which relies on lower household debt which relies on income which relies on jobs. How can you enter the circle? The gov't can write down large amounts of debt and guarantee a job to all willing and able to work. These policies would, I think, ensure a swift recovery.

Read here for more on debt forgiveness.


  1. Sorry I just scanned the link. A couple of questions. How is this different than bankruptcy? Right now student debt isn't included but that should be an easy fix. Also would this keep Banks from over lending or just lending altogether? If every decade or so there is mass forgivness. I think this is one of the demands of the Occupy Wall St movement. What are your thoughts on them? Thanks.

  2. Good questions. I will address them soon.