By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Finance doesn’t get the disrespect it deserves. Nothing about money and credit is sacred – certainly not quantity of currency outstanding. The political and monetary authorities should feel free to add and subtract money as needed to help the economy function better.
Consider the current oversupply of debt. Loans can be a very helpful financial tool. But right now, the tool is malfunctioning. The vast quantities of debt sloshing around the global financial system have brought much of the developed world into a sort of financial gridlock. Companies and households restrain their hiring and spending because they feel financially insecure. Governments are reluctant to borrow more because their balance sheets are stretched.
The result: people are unnecessarily and undesirably unemployed, useful investments are not made, and consumption is pointlessly restrained. The efforts to push up economic activity generally involve adding more debt. The financial overhang is not the only weakness in developed economies, but it has amplified the damage done by problems such as income inequality and labour market rigidities.
It’s time for a new approach. If finance were treated as no more than an economic tool, the answer to too much debt would be obvious: stuff balance sheets with enough cash to make them healthy. Here is a very simple, three-step path to significant systemic deleveraging.