Nobody Understands Debt
So how much progress have we made in returning the economy to that “normal state”? None at all. You see, policy makers have been basing their actions on a false view of what debt is all about, and their attempts to reduce the problem have actually made it worse. First, the facts: Last week, the McKinsey Global Institute issued a report titled “Debt and (Not Much) Deleveraging,” which found, basically, that no nation has reduced its ratio of total debt to G.D.P. Household debt is down in some countries, especially in the United States. But it’s up in others, and even where there has been significant private deleveraging, government debt has risen by more than private debt has fallen.
You might think our failure to reduce debt ratios shows that we aren’t trying hard enough — that families and governments haven’t been making a serious effort to tighten their belts, and that what the world needs is, yes, more austerity. But we have, in fact, had unprecedented austerity. As the International Monetary Fund has pointed out, real government spending excluding interest has fallen across wealthy nations — there have been deep cuts by the troubled debtors of Southern Europe, but there have also been cuts in countries, like Germany and the United States, that can borrow at some of the lowest interest rates in history. All this austerity has, however, only made things worse — and predictably so, because demands that everyone tighten their belts were based on a misunderstanding of the role debt plays in the economy.
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Frequently Asked Questions about this Article…
Deleveraging refers to the process where debtors reduce their liabilities. It's problematic because when everyone cuts spending simultaneously, it leads to a decrease in global incomes. This interconnectedness means that one person's spending is another's income, so widespread spending cuts can harm the economy.
According to the article, there has been no significant progress in returning to a 'normal state' since 2008. Policymakers have misunderstood the nature of debt, and their actions have often exacerbated the problem rather than alleviating it.
The McKinsey Global Institute report titled 'Debt and (Not Much) Deleveraging' found that no nation has successfully reduced its total debt-to-GDP ratio. While household debt has decreased in some countries, government debt has increased, offsetting any private sector deleveraging.
Yes, there has been an unprecedented effort towards austerity, with real government spending cuts across wealthy nations. However, this austerity has worsened economic conditions because it was based on a misunderstanding of debt's role in the economy.
Some believe more austerity is needed because they think families and governments haven't made a serious effort to reduce debt. However, the article argues that this view is misguided, as significant austerity measures have already been implemented.
Government debt has increased in many countries, even where private sector deleveraging has occurred. This rise in government debt has counteracted any reductions in private debt, contributing to the overall lack of progress in reducing total debt levels.
Countries like Germany and the United States have implemented spending cuts despite being able to borrow at historically low interest rates. This approach is part of the broader austerity measures that have been adopted across wealthy nations.
Economic policy decisions have been influenced by a misunderstanding of debt's role in the economy. Policymakers have focused on reducing debt without considering the interconnected nature of spending and income, leading to policies that have worsened economic conditions.
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