What to do about debt

By Edward Hadas
May 30, 2012

Debt, a little like sex, is a two-sided relationship which, when used appropriately, pleases the partners and is good for society. But both are also intoxicating and can easily become excessive and anti-social.

The financial bubble of the 2000s was the financial equivalent of the 1960s enthusiasm for “free love”. The delights of nearly free debt set pulses racing. Since the financial collapse, the dangers of uncontrolled borrowing have been recognised, but the bad habits have hardly changed.

When debt is used as it should be, lenders receive a just return on their assets and borrowers pay a just price for the use of the fruits of other people’s labour. Loans finance helpful investments and assist governments and individuals to manage periods of adverse fortune. But debt can also be used for promiscuous pleasure-seeking, unaffordable consumption, unjustified corporate investments and excessive government spending.

In the recent debt party, the United States led the world. The ratio of total U.S. debt (private, corporate and government) to GDP increased from 256 to 373 percent between 1997 and 2008, according to Federal Reserve calculations. The whole country borrowed from foreigners to fund its trade deficit. The financial sector borrowed cheaply and invested dangerously to increase returns and remuneration. Homeowners borrowed more and more to buy more expensive houses.

At first, all this indulgence appeared to be beneficial. GDP growth was strong, consumption was high, unemployment was low and higher asset values – the other side of higher debts – made borrowers feel richer. But when Lehman Brothers failed in 2008, the dangers of frequent debt relations with multiple financial partners became clear. With everyone borrowing from each other, losses on bad loans, and the fear of further losses, spread rapidly around the world. A Lesser Depression set in, and there is no end in sight.

Despite much talk about the end of an era of hedonistic borrowing, financial rectitude remains a distant prospect. Governments have stepped up borrowing just about as much as the private sector has cut back. In the United States, debt remains an alarmingly high 359 percent of GDP.

What can be done to restore financial order? For irresponsible borrowing, a sudden outbreak of prudence would probably aggravate the economic problem. The economist John Maynard Keynes called it the paradox of thrift. If everyone tries to save more and spend less, the result will be a decline in total consumption, which leads to higher unemployment and then to more saving against rainy days. The desire to prevent such a spiral of decline lies behind the today’s low official interest rates, high government borrowing and generous support for banks.

These policies are supposed to spur enough GDP growth to reduce debts without economic pain. That sound like wishful thinking. As long as debts remain high overall, the whole financial structure will remain vulnerable and full recovery elusive. The euro zone crisis shows just how little it takes – a few small weak governments and some political wavering – to frighten lenders and deeply disrupt developed economies. With so much leverage about, other crises will be almost unavoidable.

What is needed is a large and fast decline in borrowing – a systemic deleveraging – to give over-indebted rich nations a fresh start. Sadly, there is no easy way to proceed. A gigantic debt write-down would do the trick, but creditors would be furious. Think of how the Chinese government would feel about being told that its $2 trillion dollars of U.S. government debt is now worth half as much, or how current and future pensioners would react to big losses in portfolios they thought were safe.

Mandatory inflation – say a law which doubled all wages tomorrow – would also reduce the ratio of debt to GDP, and would also infuriate savers and creditors. Alternatively, newly minted money could be used to stimulate economic activity through the creation of new jobs and the repayment of old debts. However, when governments feel free to create rather than to borrow money, they rarely stop before the rate of inflation rises dangerously high.

All of these techniques for deleveraging are risky. But I believe a clever and internationally coordinated combination of debt write-downs, inflation and controlled money creation is the best way to engineer a durable decline in leverage without destroying financial trust. Such radical techniques could work, given enough political support and sufficiently imaginative regulation.

The alternative to daring action along these lines is the continuation of something like the current policies. That amounts to persisting with the “nearly free debt” experiment, which will only lead to years of depressed economic activity and outbreaks of unpredictable financial losses. It’s worth trying something new and different to put debt back in its rightful place.

13 comments

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I’m sorry Edward Hadas, but I’m NOT getting nor do I need sex advise from the likes of you.

Now if Bill Clinton or say Ruby Knox

http://www.4tube.com/pornstars/ruby-knox

Wants to talk about the economy and chooses to use a sex analogy, having the street creed, I’d pay attention.

But the idea of you bumping nasty, frankly, makes me a bit nauseous.

By the way, generally a big fan.

Posted by Lord_Foxdrake | Report as abusive

Moreover,

Sex and the economy is a terrible analogy.

First if your sex is prudential and reasonable (like yours seems to be – “used appropriately”), you’re doing it wrong.

Very wrong.

Sex is suppose to be … well intense. It’s suppose to be full of passion. It’s suppose to be messy and reckless; it has to occur in public restrooms and only after walking outside does one realize that the crowd waiting for the bus at the Tenleytown station got a free show through the mirror you thought was glazed.

The applause lightened the momentary embarrassment though.

This happened to me once while attending American University in DC; shi’te school by the way; total rip off.

Sex should be intoxicating and excessive but where you’re wrong is that it’s … extremely social.

It just depends upon who’s social now doesn’t it?

Perhaps “ass-chaps” in the board-room might be anti-social by anyone’s yard stick, but do you think if Steve Jobs walked into the office one day wearing them anyone would say anything?

Now as to debt, it’s perhaps just the opposite of what you infer.

The economy is in recession or is that Great Depression 2.0?

Sounds like everyone is pulling back and pulling back at the same time.

The legs are closing. The tally-wackers have gone limp.

What’s needed now more than anything is “stimulus!”

And lot’s of it.

Ergo, perhaps, the white catholic, four-eyed, bald, 50+ plus something middle aged man doesn’t have the answers?

Perhaps what’s needed is someone young and virile with the intent to please that lady at ALL COSTS!

Someone who’s willing to go boldly and with a bit of reckless abandon? Someone who doesn’t need to schedule it like a weekly tee-time; for all of 10 minutes and then get a pat on the head and a hearty “well done.”

But rather, someone that leaves that girl, a bit broken, definitely breathless and begging for more. That lights a fire in her soul and forms a bond that leaves her “mad about the boy.”

You may have all these degrees from Columbia and Oxford and I may have just earned my degrees from state (Rutgers) but I think, perhaps, you may not know as much about economies as me?

Posted by Lord_Foxdrake | Report as abusive

@Lord_Foxdrake
Sex to debt is the perfect analogy. And your kind of sex/debt makes a great big mess. We’ll be paying child support for generations thank you very much.

Posted by NilsPils | Report as abusive

@Nils

we’re talking about sex, not reproduction.

that’s what condoms, abortions and birth control is for.

have, sex but have it responsibly…use a rubber or the pill.

you white-bread dudes never really partied did you?

Posted by Lord_Foxdrake | Report as abusive

NilsPils -

With respect to generations of child support, I assume you’re referring to the national debt of the USA, which currently has a debt to GDP ratio of almost 1:1 exactly. In other words, bupkis. To reiterate…

The US came out of WWII with a government-debt-to-GDP ratio of about 1.25, and survived quite nicely, thanks to the fact that nations are virtually immortal, and thus, unlike households, never give a lender cause to worry about their actuarial prospects. Nations can therefore maintain high debt-to-GDP ratios forever. Mortals can only maintain high debt-to-earnings ratios from about age 25 to age 55 – hence, the 30-year mortgage.

Note: Mortals, such as humans, have sex. Immortals, such as nations, do not. Such is the price of immortality.

Posted by TobyONottoby | Report as abusive

Lord_Foxdrake -

Well done!

Posted by TobyONottoby | Report as abusive

Edward Hadas -

Also well done, and don’t let Lord_Foxdrake knock the glide from your stride!

Something else to consider – The class of problems for which there is no technical solution. Nuclear warfare and overpopulation have been placed in that category. Perhaps debt belongs there as well. Administrative solutions have been suggested for such problems*.

*The Tragedy of the Commons by Garrett Hardin
http://www.sciencemag.org/content/162/38 59/1243.full
Science 13 December 1968
Vol. 162 no. 3859 pp. 1243-1248

Posted by TobyONottoby | Report as abusive

Mr. Hadas is a far more versatile and talented man than some people, who appear to harbour insecurities regarding their own background and possibly their own sexuality, seem to think. He’s been taking this lady’s breath away for years, so there you are.

Posted by melisande | Report as abusive

Thanks you helped me figure out the solution of how to get out of this economic depression…..and I have not known the answer to the problem for almost 3 years. Way cool, now I know 4 answers an OCD needed! (world GINI/environment, Education, Medical and now ending the depression)

http://www.tryfreedom.us/2009/07/26/rece ssion-or-depression/

Posted by ThomasisaPaine | Report as abusive

@Lord_Foxdrake –
I must point out that you inadvertently proved Mr. Hadas point that sex and debt is a fantastic analogy by expressing the view that economies should take the same attitude toward debt as you have toward sex.
I’m just sayin’.

I also find it ironic that in your version of the analogy sex exists only as a stand-alone act with the focus on performance of the act itself. There is very little in the tone of your comment that would imply that you value such things as commitment or loyalty to compliment your brand of virile and messy sex. Of course good sex takes effort and passion. But good relationships require these things as well as commitment and loyalty. Sex obviously can be a tremendously helpful part of healthy relationships. But why deny that it can also be incredibly destructive? The failure to recognize long-term consequences is perhaps the most powerful aspect of the metaphor, and one which you have just proven marvelously by ignoring them entirely. And until we can change our attitudes toward debt and increase our level of commitment to reducing irresponsible over-borrowing, our efforts will be about as effective as an unfaithful husband trying to fix his failed marraige with a little Viagra.

Posted by Hogwashua | Report as abusive

wow, really smart reporting.

Posted by dcyacht | Report as abusive

Sex is like debt in that it makes you feel good for the moment yet ignoring the the real structural and long-term problems.

Imagine a person in bad situation, will sex make him less depressed? Yes of course, he will feel better for the moment, but the real problem will still be there.

Will more government debt solve the big underlying problem? No it won’t, but it will make things look better for the moment, it creates more “jobs”.
Keynesian expansionary monetary policy is like having more sex to feel better for the time being.

The solution to solve the long-term structural problem requires a lot of values and characters that are devoid in today’s society and culture.

We are what we try to be. We evolve into what we value and tolerate, and we definitely are valuing and tolerating the wrong values and characters. Economics depression is simply the corollary.

Posted by trevorh | Report as abusive

Not to beat this into the ground but the promise of Barak Obama was to “be able to walk and chew gum at the same time.”

When the system is broken and people are depressed, the first order of business is to get them feeling better. The get the machine working again and when that happens, make the structural improvements that keep it going or dare I say, make it better.

Think about a relationship you’ve has with a really hot girl. (That’s IF you’ve had one)

There’s all sorts of issues, she’s hot, she’s passionate, she has an arse to kill for but … alas, she’s crazy.

There’s serious structural issues there.

Now, you’ve had a really bad fight. She wanted you to spend the day with her mom (a potential mother-in-law). You want to go the Yankees or Phillies game (no one watches the crappy Mets). Moreover, you’ve been planning this for a long time with a bunch of your bros.

You’re going.

So you go, she’s pissed, throws all your stuff from the third floor window of your apartment and curses at you in Spanish for 2 hours while your stereo equipment rains from above.

You’re in hell. You’re depressed. This isn’t working.

Time to MAN up.

Time to go up there and profess your undying love.

Time to get on your hands and knees and do whatever it takes to “bring her back to reality” from a state of hyper-insanity.

Then once she’s cried for 2 more hours, you’ve yelled for 2 more, she’s gone in the bathroom, the bedroom, packed and unpacked her stuff 1/2 a dozen times…

You finally kiss and fall into the embrace of each other’s arms.

Then something magical happens.

Make-Up Sex.

The edge is off. The anger is drowned in a pile of shame and sweat and love.

And for a moment, all is right with the world.

Then, the next morning, you wake up early, make her breakfast, shower, dress, leave early for work.

And then sometime on the subway, you make an appointment with a couple’s therapist; because as great as last night was, and now that your stereo equipment is back where it belongs.

You’re NEVER going through that again; you’re not hanging with her Mom and you’re NOT missing the Yankees game.

Those “structural issues” are going to addressed.

Or you’re finding another HOTTIE! Stat.

Posted by Lord_Foxdrake | Report as abusive