Saturday, September 26, 2015

Why the level of private debt is important

Those who spend beyond their income (spenders) owe those whose income exceeds their spending (savers). If net savings is greater than the need for capital to expand production to meet demand, i. e. savings is too high compared to spending, that means lower demand for goods and services resulting in recession and ultimately depression. This excess of private debt is important. The concept of a Debt Jubilee (periodic cancellation of all debts) was used in past economies to fix this situation. In the current era, redistribution of debt, wealth, and income through living wage laws, progressive tax policy, inheritance tax laws, and relaxed bankruptcy laws could accomplish the same thing.

The converse is also true. If the debt is too low to finance production to meet demand, i. e. spending is too high compared to saving, inflation results and must be controlled by the reverse of the measures prescribed above for excess debt.