Thursday, January 16, 2014

Why Have Modern Economies Become Dependent Upon The Wrong Kind Of Debt?

Adair Turner has observed the negative effects of the extensive use of debt in the global economy over the last few decades.  Public and private debt has grown much more rapidly than GDP or income and he asks whether there is something wrong with modern economies.  Why is adequate demand growth dependent upon damaging debt growth? 

He points to three issues that may be at the root of our economic problem.  In the first place, much of the debt is used to purchase existing assets.  It is not being used to expand productive capacity.  Stock prices and the prices of existing homes rise but jobs are not being created.  This creates a wealth effect that stimulates consumption without addressing the drivers of income inequality which makes consumption dependent upon debt.  He also argues that global imbalances are part of the problem.  We have creditor nations and debtor nations that result from trade imbalances.  These imbalances are not sustainable.  There has been a huge expansion of debt that is not being used to create sufficient demand. It is being used for the wrong purposes.

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