On debt redemtion

People borrow to increase their spending. To pay back what they have borrowed, they then reduce their spending fractionally for a period of time. When the access to credit is generalised, this logical process has two consecutive and opposite effects. The first is an increase in demand, production and incomes. And that extra income compensates to some extent the drop in spending due to the credit pay back. Fuelled by debt, the economy grows. But at some point everyone has borrowed all they can or want to, and new borrowing tapers off. The amount of debt being granted approaches the amount that is being redeemed, and growth in spending, production and incomes slows down. The second effect is more paying back than borrowing, with less spending leading to economic recession. This fatality can be offset by the renewal of credit at term, which reduces the drain on spending to just the payment of interest. And, ultimately, interest rates can be lowered to or below the rate of inflation.

Free credit that is never paid back is a wilful attempt by central banks at bringing back economic growth. So far the results are far from conclusive. The main beneficiaries have been corporations that have used massive loans to buy back shares and to hand out more generous dividends, neither of which increases production or consumption. They just encourage more speculation. Growth has slowed in China, is stagnant in Japan and Europe, and the anaemic growth in the US seems driven by student debts and credit for car buyers, both of which have peaked and are being defaulted on in ever larger numbers. Mass credit multiplies exchanges but ends up as an unsolvable problem.