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The Debt Crisis is Private, not Public

May 30, 2012

What this chart means is that in the US private not public debt has risen to unsustainable levels. Public debt vs GDP has generally fallen under Democratic administrations and risen under the Republicans. When in 2008 (and 1929) the out of control rise in private debt collapsed as it must, public debt rose to compensate for it in an effort to forestall an even greater depression or recession.

What appears to me happening now is a mad attempt by Wall Street and the Republican Party to transfer public capital into private hands in an effort to preserve the values and rates or return of  financial speculation. To accomplish this feat, they propose massive tax cuts that benefit the financial investor coupled with reduction of everything government does that does not directly advance salvaging those returns.

Contrary to the beliefs of both Liberal and Conservative economists, neither the rise in public debt nor its reduction will solve the problem, although liberal inspired temporary rise in public debt was all that kept the nation from collapsing immediately into financial Armageddon.

Until private debts are readjusted by either massive defaults or inflation and the resulting temporary collapse of the nations major financial institutions absorbed, we cannot get out of this mess. Increased public spending on infrastructure without an increase in the production of goods and services is at best a temporary, but in my opinion, necessary stop-gap.

Unfortunately, mature economies with stagnant population growth like in Europe or Japan do not need new production to satisfy a growing population; only replacement production for worn out goods. They must live mostly on exports.

Although US population continues to rise, so long-term demand may continue to grow for a while, current demand is stagnant. Alas, the US has catabolized its industrial capacity in favor in an orgy of asset securitization and has replaced its industrial economy with a service economy. A service economy regrettably has a limit to how many hamburgers per person can be consumed or insurance policies acquired.

So, what can the average person do about it? Nothing, except to prepare oneself for a relatively low-income existence. In the foreseeable future, those with the least needs will probably do better than those with the most wants.

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