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Source link: http://archive.mises.org/10438/the-debt-crisis-cannot-be-solved-with-more-debt/

The Debt Crisis Cannot Be Solved with More Debt

August 11, 2009 by

The principal problem with the current economic crisis is that the authorities are trying to solve the debt crisis by adding more debt — which is akin to trying to cure a viral infection by injecting more viruses. In case some have forgotten, the United States is undergoing a serious credit crisis, that is, a debt crisis.

All sectors of the American economy are suffering from a chronic addiction to credit, which manifests itself as the disease of excess debt. Household, business, and public debt have reached all-time highs. Consequently, it would not seem logical for the federal government to fight the debt crisis by adding trillions of dollars to the national debt and by lowering interest rates to promote even more credit. FULL ARTICLE


A. Viirlaid August 11, 2009 at 8:59 am

Bank credit increased from $9.15 billion, at the start of the crisis in September 2008, to $9.31 billion as of June 2009.

Is the above quote correct?

Billions seem a little low?

BTW, great article!

A. Viirlaid August 11, 2009 at 10:04 am

Thanks for the correction, A.V.

“Bank credit increased from $9.15 trillion, at the start of the crisis in September 2008, to $9.31 trillion as of June 2009.”

Doug August 11, 2009 at 12:31 pm

“The result of this must be unsustainably higher levels of debt — and the worst financial crisis ever seen in the history of mankind.”

I agree with this assertion, but where in history can we show people the real impact to them as individuals? We all know the US debt is bad we can all show how the size of debt increases and becomes a larger % of GDP. But if the rest of the world continues to buy Treasuries it makes it hard for people to see the need for panic.

Personally, if you or I were in debt and we needed to borrow money and nobody would gives us a loan…that is a crisis! As for the US, people are still lending money to the Gov’t. No crisis, but we all no differently except we can’t articulate it to the layman.

steve August 11, 2009 at 12:45 pm

I agree that the debt crisis cannot ultimately be solved by more debt. But one should perhaps acknowledge that Obama/Bernanke et al’s position is more subtle than simply denying this point. The argument (in very simple terms) is that the excess of debt created a bubble that pushed the economy over the edge. It therefore faced a meltdown recession without the government taking action to provide further credit in the short term. This recession would feed upon itself with results similar to the 30′s depression. Clearly however the new government debt will have to be repaid over the medium term and the previous excesses corrected. Therefore the argument is not about excess debt per se – it is about the timing of removal of the excess debt. No doubt there are good arguments why the current policies will be less effective than allowing correction by natural means. But I think it would be worthwhile if this type of argument were to be addressed – rather than pointing out the apparent foolishness of attempting to correct an oversupply of credit by supplying yet more credit into the system.

G8R HED August 11, 2009 at 12:55 pm

Solving the debt crisis with more debt is a successful means of satisfaction for those who desire to be on the receiving end of the transfer of wealth and power from society to the state. What motivation exists to stop it?

greg August 11, 2009 at 1:34 pm

Let me put this situation into a level that is easier to understand.

Last year I lost $170,000 in my personal market trading business. When the Fed stepped in to give money to banks in exchange for shares, I took a $100,000 loan and invested along with them. As of today, I have paid the loan off, recovered my $170,000 loss and my account has grown beyond that.

Based on my performance, I have to assume the Fed has realized the same success.

You have to understand, credit can help an economy grow if used wisely. I believe the Fed has done just that. It is the Treasury that is more political that is having problems.

Oh, a lot of viruses are stopped by injecting dead viruses.

Econ Guy August 11, 2009 at 2:30 pm

Any discussion of our current debt problem is incomplete without mention of the government’s unfunded liabilities. The Dallas Fed estimated current unfunded liabilities are 99 trillion dollars. That’s more than $300,000 per American. This is the most significant threat facing America. The government must either raise taxes, cut spending, or inflate. Higher taxes and spending cuts are politically unpopular. The government will inflate.

Ned Netterville August 11, 2009 at 2:31 pm

Greg, Congratulations on your astute trading. However, it appears that your success may have blurred your perspective on the current depression. The objective of the Fed’s intervention in markets during this period of depression has not been to enable you to recoup your stock-trading loses. On too many occasions to enumerate, President Obama, his V-P, his entire cabinet, most members of congress–reps and dems alike–as well as the chairman Bernake, have all expressed the idea that the primary objective of the federal government’s monetary and fiscal policies is to create jobs. By any measure of employment, the policies have all been failures. Although the evaporation of jobs may have slowed, there is no way of knowing–except by reference to economic theory–whether or not the economy and hence the job market would by now be vigorously growing if instead of monetary and fiscal “stimulus” the government had adopted a hands-off, laissez-faire approach to the depression.

Ireland August 11, 2009 at 2:56 pm

Regarding debt, I quite like the idea of the marginal productivity of debt, i.e. looking at how much the next piece of debt adds to the output (or extracts from it). See A.E.Fekete’s paper for more details.

A. Viirlaid August 11, 2009 at 6:58 pm

David Saied’s article is a very lucid and concise look at America’s biggest problem.

It’s so lucid that there is really nothing to add to it. But permit me to add a few words in agreement.

Too bad America’s leaders won’t see this article or if they do, will only see it through their heavily-blinkered eyes.

Debt works when the investment it is used for can generate sufficient income to service the debt and eventually to pay it off.

When debt is used for discretionary consumption it rarely meets this standard.

Debt can create order for the borrower if it is employed judiciously.

Or disorder if it is not so used.

Same goes for society-at-large.

The lender also gets greater order out of the lending transaction but only if the lent amount gets paid back with interest.

In real terms, that is.

David Saied is correct IMO — the Treasury and the FED both seem to believe that if only we incur a ‘bit’ more debt now, we will get things “moving again”, and get that new, additional debt quickly paid back.

They both also seem to believe that we might even then be on a better footing — that is, to have the overall economy service all the other debts previously incurred, prior to all the recent ‘stimuli’ both from borrowing and money-printing.

I just happen to agree with Mr. Saied — this is all a pipe dream on the part of our leaders.

First the monies so ‘invested’ (even those in so-called capital projects) are not likely to generate any meaningful return for a long time if ever.

And just forcing consumption spending to go up in an untargeted fashion won’t help either — if it ever could help, today we certainly wouldn’t be in the mess we are in.

BTW, this is what the FED will try and do — FORCE you to spend your money even if you don’t want to.


They will do it by using the threat (AGAINST YOU) of diminishing the value of your held dollars through inflating the money supply — that is, by printing more and more additional money, thereby reducing the value of ALL dollars in circulation.

Don’t believe that?

Just see our dear FED Chairman’s, Ben Bernanke’s, own words at the FED’s website at the following link — this is his famous Helicopter Speech for Defeating Deflation In Our Time — but it really amounts to The FED’s Operating Manifesto for Our Times by Dr. Ben Bernanke:


The FED is a doctor that thinks he knows how much debt to force-feed into the economy.

The FED thinks that if your ‘propensity to spend’ is not high enough IIOO (In Its Own Opinion) that it then knows what to ‘set’ your spending thermostat at — even if you would really rather not spend at that level.

This is due to the FED’s misunderstanding of the Paradox Of Saving — of course we would never have had to encounter this “POS” if the FED had not so stupidly created one financial bubble after another over the last 96 years.

This is the quiet, disguised, and corrupting influence of a central bank that has such a high propensity to inflate the money supply and thereby encourage spending and debt accumulation.

It has a very insidious affect on our whole Western culture (and not just in the United States of America).

There is no way that the public sector can even begin to identify the best uses for the scarce resources that are now being wasted in so cavalier a manner.

In Thermodynamic terms or in Entropic terms, we are just piling more disorder on top of the disorder that already exists — in terms of more and more unrecovered and-or unrecoverable debt.

For normal people, like you and me, it goes without saying, that for any project that requires societal resources we need to be very careful to ensure that ‘it pays its own way’.

It seems silly that David Saied has to remind our societal leaders of this trite fact.

But the sad fact is that they don’t seem to be much aware of this simple truth.

To be of use to our society, we cannot simply do something like building tanks and immediately sinking them in the ocean.

But what we are in some measure doing is exactly this. Of course the waste is not 100% as in my example, but the idea is the same.

If you don’t get a net POSITIVE return over time, you ain’t gonna stay in business; in fact you won’t even stay alive, either individually or as a CIVILIZATION.

To create order out of disorder, all life uses its limited resources very judiciously. It has to. Otherwise it perishes.

Are we really just so relatively rich that we can no longer easily recognize this very real natural constraint, this limit?

I guess so.

This makes it all the more difficult for us all to adjust, as Doug makes clear.

How can the layman, Everyman, ‘feel’ the problem if it appears to be non-existent?

The Grand Illusion, created by the Borrowed Prosperity, that David Saied so colorfully describes, has only been possible through the running of the greatest financial experiment in history — call it a PONZI scheme for that is what it amounts to — all organized by a corrupting Federal Reserve Bank of the United States — and all since 1913.

And make no mistake — all of society and all of us have repeatedly, over generations, been thereby corrupted. Cash is Trash. Spend it now! Why bother saving?

In the long run, we are all dead — even though our children and their children may not be.

Do we really care so little about them?

Is it not time to once and for all end this experiment?

The Children of the Depression are perhaps the only uncorrupted ones there are IMO.

They are mostly now gone from our midst. But all of them, invariably, when you listen, will have been whispering, sincerely BEGGING all of us to not do what the generation of the 1920-s did.

Did we listen? No — and now it’s just too bad for us.

After all, like the wisdom in PUD’s Double-Bubble Gum says:

“If you find yourself in a hole, stop digging!”

Steve and Doug make good points — the U.S. can borrow for some time yet to come. The country still has some credit left in the world debt markets.

But the pertinent issue here is that there is no point going DEEPER into that Rabbit Hole of Debt — I cannot see how the meltdown will be avoided — and the collapse will be all the greater for putting THAT Day of Reckoning off.

Whether we keep ZOMBIE companies or banks alive, all of the required resources to ‘save’ such broken entities come from somewhere.


From the green shoots that really could feed a new generation of businesses and young people and entrepreneurs.

What do we say?

We tell the Japanese not to keep ZOMBIE companies alive. We say ‘let them die in peace.’

But what do WE ACTUALLY DO?

We give our ZOMBIES all the blood of our young that these walking dead want. The ZOMBIES want to invade the nurseries where young businesses are being formed, where they are starting their lives, and these ZOMBIES want to eat these young.

And then we are surprised when the ‘recovery’ is slow in coming? F.D.R. sure was surprised because that is exactly the policy he followed in the 1930-s!

Why in heaven are we surprised? Are we stupid?

Do as I SAY, not as I DO?

Our economic leaders say this is because we have Idle Resources, closed factories, and unemployed.

Yes, that is true.

But when you reactivate those “Idle Resources” they don’t start up AUTO-MAGICALLY on their own. They need the blood of the living.

They still consume resources that could find better use elsewhere through the ingenuity of our young resourceful people.

What do we do?

We say, to those potential entrepreneurs, well, you’ll get your turn, once these ZOMBIES are alive again.

I say if those ZOMBIE companies can start up on their own, thank God, and Godspeed.
But otherwise, why, why, why?

Show me one case where Ben or Tim have fixed a company without using resources stolen from somewhere else.

As it has been written many times, governments don’t create, they only at ‘best’ transfer resources from one place to another, usually at grievously harmful cost.

The FED also seems to think that if it moves new printed money into some new situation, something magically will happen.


Oh, it will ‘stimulate’ things. It will make things ‘happen’.

It won’t do anything of the kind.

This kind of ‘printed’ inflation money is transferred from the poorest people who have some cash and usually nothing much else into ‘making things happen’.

Because inflating money is a hidden tax — that is acknowledged by everyone. But we still do it. Please, hit me on the head. My head must be solid wood. I’m still not ‘getting it’ at least I’m not getting The Gospel According To The FED.

This just creates additional unnecessary DISORDER — lives are being hurt. What Dr. FED does is kill people.


But then of course, I forgot, we are so rich, that Cash is Trash. We can afford to experiment and throw money, and the resources thereby activated, away.

Maybe TECHNOLOGY or CHEAP ENERGY will save us?

I heard someone say on TV yesterday that the Future is SO Bright.

We haven’t begun to see the WEALTH that Technology will create for us.

Well maybe, but I kind of doubt it.

Technology provides more efficient ways of providing for our needs and wants.

But there is nothing written in stone that guarantees that Future Technology will give us the kind of efficiency, and Wealth, that it has in the past.

Does your Blackberry make you richer?

Maybe, if you can close a deal faster, or get a competitive edge, or perform some service more efficiently.

But it won’t likely grow your carrots or side of beef much faster than they are grown today.

Even if it could help there, we all have to run that much faster just to stand still. Technology can also use up human capital.

IMO there is are limits to the ‘efficiencies’ that Technology can deliver.

What about cheap energy?

Well those days, if you evaluate energy by the power contained within it, and the transportability of it, are probably going by pretty fast. Oil can safely IMO be seen as a nonrenewable resource. Oh sure, you can make something like it out of corn (with all the attendant miseries).

But as one smart person recently wrote, oil gave all of us a standard of living this past century, that only Popes and Kings could enjoy in the past, and then they only could through the use of Slave Labor.

Will that day come back? When the ugly side of human nature has the strong make the weak submit to their will?

Or will the future bring us another such cornucopia as we had with oil’s ‘cheap’ energy?

Boy, I sure hope so, but I would not in the meantime bet OUR collective Ranch on that possibility.

And THAT, my friends, is exactly what our Feds and the FED are doing today — Betting Our Collective Ranch.

Ultimately that is why we should agree with what David Saied posits in his to-the-point article.

One last thing, I’ll know it’s all over, when China proposes something equivalent to Brady Bonds for “US”.

Bennet Cecil August 11, 2009 at 10:25 pm

The US government is able to refinance trillions of debt at current low interest rates. This has emboldened politicians to invade 2 countries and embark on massive transfers of taxpayer funds to well placed corporate titans. On top of that, another huge medical entitlement program will soon be enacted.

This false prosperity will continue for a bit longer as the Fed keeps interest rates at zero. The party in power will try to hold the economy together until the 2012 election. They will try to close the deficits by taxing corporations, high income earners and energy. This will choke the economy into stagflation. We will have our own lost decade or two decades as government and their corporate cronies continue bailouts for the well connected.

The federal debt has increased by 9.25% annually since 1970. Somewhere between $20-40 trillion of national debt investors will shun US debt, pushing interest rates to junk bond levels. A junk bond fund will be a safer investment since it has diversified holdings. Holders of US debt will get zero if the government defaults.

Taxpayers will revolt against higher taxes on the average household and the US government will be forced to actually cut spending. There will be a huge American crisis when trillions of dollars from abroad suddenly rush home to America doubling and tripling prices overnight. The government will collapse if it cannot pay its huge workforce. So much for that safe government job!

Hopefully, this catastrophe will be averted. If the dollar plummets against other currencies and against commodities, the American voter will abandon unsound economic and political choices. Until then, we will continue to live in Fantasyland.

Sally C. August 12, 2009 at 7:41 am

Excellent article and I just wanted to add to A. Viirlaid – you should try to have your heartfelt rant published as well. Maybe it would make more people stop and think.

A. Viirlaid August 12, 2009 at 10:02 am

Thank you Sally C.

To Ireland, also thanks for the great link to Professor Fekete’s interesting article.

One quote says it all:

“In the worst-case scenario the marginal productivity of debt may fall into
NEGATIVE territory.”

This is even worse than I thought possible.

The whole debt-money system is now sending such poor signals to investors and other decision-makers, that we might actually be DESTROYING capital with every new loan we create (at this current point in history).

If we are really at this point, then the Entire economy can be seen to be One Giant ZOMBIE that has already killed everything else and is now devouring itself with every step it takes.

Boy, maybe we really are Doomed?!

A. Viirlaid August 12, 2009 at 10:09 am

Thanks to Greg for your lucky-investment story.

Have we not already hashed over your success-story at least once before at the link:


Anyway, as Ned Netterville writes:

“Greg, Congratulations on your astute trading.”

But your personal success does not translate to anything to do with what is good for our economy going forward.

People’s wellbeing is intimately associated with what will happen.

And the $$$ you made have little to do with that.

This overall wellbeing is what we are concerned with here, as you well know.

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