Is there a way towards economic serenity?

All the economic parishes agree on the fact that too high debts are harmful. However, they diverge when the profile of the debtor is considered because, while the Austrian school is primarily concerned with public debts, the neo-Keynesians attach much more importance to private sector debts. The classics are indeed indifferent to the debts of private individuals, because they assume that the aggravation of the level of their debts is only a transfer of purchasing power from an individual (or a company) to the another, thus having an overall zero macro-economic consequence. These Orthodox, on the other hand, stigmatize the public debt accused, according to them, of preventing the private sector from investing because the available money is monopolized by the State, while increasing the burden of future generations in the process.

The Keynesian school, for its part, is more or less indifferent to the level of public debt because this – after all – is denominated in a currency that its central bank can print indefinitely. They are therefore in favor of monetary creation capable of encouraging consumption and meeting the needs of the economy in terms of financing. Their thesis was royally confirmed by the various and massive interventions of the central banks since 2007. But also by the venerable Bank of England which arbitrated in 2014 in their favor, affirming that the loans granted by banks indeed constitute a monetary creation, that this new arrival of money in the economy benefits GDP and assets in general. In other words, private debt stimulates aggregate demand. Hence the example of the economic liquefaction of Spain during the European crisis of the 2010s, attributing the depression that hit this country to a plunge in its private debts from 35% of GDP in 2008 to 19% in 2014, and therefore attributing the recession to a net halt in consumption due to a plunge in access to credit.

It was the economist Irving Fisher who was the first to theorize the pointlessness – on a macroeconomic level of course – of repaying debts because each dollar returned is a dollar destroyed. Under this logic, any new loan obviously benefits the money supply. As early as 1932, he wrote in his “Theory of the Great Depressions” that (my translation from french) “when a debt to a bank is paid by debiting another account, it is the whole sum which is therefore erased”. The fall in the quantity of money in circulation thus causes a fall in GDP, a phenomenon which in turn leads to an increase in the overall ratio of debt to GDP, solely due to the repayment of the debt. “It is really the attempt on the part of private individuals to repay their debt that increases it. We are faced with a great paradox that explains the great depressions: The more debtors owe, the more their indebtedness increases”.

Almost a century later, I understand that this thesis can still shock. The fact remains that our nations today desperately need to find a way to reduce their debts (relative to their GDP) without sinking their economy, without harming creditors, without encouraging excessive risk taking , without encouraging speculative bubble hunters, without causing a new Great Depression or a new world war.