I think it’s fair to say that a majority of economists believe that excessive private debt played a key role in getting us into this economic mess, and is playing a key role in preventing us from getting out. So, how does it end?Go read the Krugman piece to get all the embedded links.
A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets.
The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.
So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.
And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.
So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.
It is truly tragic to have a smart guy in charge -- Obama, as opposed to the buffoon George Bush -- and have that smart guy make the wrong choices again and again and again.
And it is frustrating to be forced to stand by ans watch the US economy flail and thrash when it should be rebounding. A good part of the younger generation is being lost to unemployment. Worse, a large chunk of the baby boom generation that was unlucky enough to be in jobs that disappeared will never get another job in their lives and live their "golden years" eating cat food because their "fellow Americans" failed to do the right thing and revive the economy.
And it is criminal that the very party that created the economic mess -- the Republicans -- now puff out their chests and strut about flapping their "Pledge" as if it meant something. They created the mess. They have no solution. But they will win the mid-terms and put the whole economy into the deep freeze. Instead of a couple of years of recession, the Republicans are going to ensure that the US will be "another Japan" and spend one and possibly two decades stumbling in the dark with low growth, with increasing poverty, with the bottom 80% of the population truly suffering. Meanwhile, the "leaders" will be uttering platitudes and painting rosy pictures of how "just one more tax cut" will turn the corner and unleash the dynamism of the American economy. Pathetic.