Debt reduction problems

Deleveraging or debt reduction is the topic of an editorial in The Economist. It lists three ways in which debt can be reduced – paying it off, defaulting or inflation.

 Debt can be reduced in several ways. It can be paid off with the help of higher thrift (though not everyone can spend less than they earn at the same time). Its burden can be reduced through higher inflation or faster growth. Or it can be defaulted on. In practice, rich countries seem to be using different combinations of these approaches.

While debt reduction is a highly desirable goal there are two serious problems with which to deal.

First, if it is achieved either by write offs or inflation, then some where some how or the other some people are going to loose some of their savings. No doubt a few people will easily cope with that but probably the pain will be felt mostly by people upon whom it with will inflict considerable suffering.

The second problem is that our money supply is based on debt and reducing debt will probably mean a reduction in the amount of money in the economy (with a multiplier effect. Of course with less money a lot of exchanges won’t take place and people will be out of jobs and there will be even more suffering.

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