At the end of the day, you need to look at everybody with loans in a collective way rather than looking at one case in isolation. I hope this clears things up for you.

I’m aware of Battelino’s comments there–and I wrote a post on it when it was published.

I’ve also recently commented on whether GDP is comparable to credit in two other posts–one a satire on Rory Robertson, the other a follow up to Rory’s reply (I see you’re replied to the latter).

GDP is not really comparable to total credit. If my income rises by $100 and my total debt rises by $110 then even at an interest rate of 10% pa, I’m still ahead by $89 (100 – (0.1 x 110)), even though my total debt has increased at a faster rate than my income. The same analogy applies to Australia’s Credit vs GDP ratio.

Also, although the interest on the total credit must be paid every year, not all of this credit is owed to foreigners, so to some degree we are paying the interest to ourselves. From the perspective of the overall economy, debts are not just negative assets. They simply represent a pledge to transfer funds from one person to another at some future point in time. They are as much an asset to the lender as they are a liability to the borrower.

In short, Australia’s credit vs GDP ratio is not necessarily a problem. Many countries have a much higher credit vs GDP ratio than Australia. No reason why our ratio can’t continue to grow.

This is what the RBA has to say about it…

QUOTE
http://www.rba.gov.au/Speeches/2007/sp_dg_250907.html

Has the expansion of household credit run its course? Will it reverse?

We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course.

In the past, the lack of access to credit had resulted in Australian household sector finances being very conservative. Even as recently as the 1960s, the overall gearing of the household sector (taking account of all household debt and all household assets) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. This meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. Financial institutions recognised this and found ways to allow households to utilise this capacity.

The increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent (Graph 6)3. I don’t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels.
END QUOTE

If we assume that a return to half current Debt/GDP will “stabilise” the economy – then a 50% debt jubilee should do the trick (rather than a complete cancellation of all debt). I would also support a 50% cancellation of all “tax-haven” bank account balances.

The only problem is that these measures break the GOLDEN RULE – He who owns the gold makes the rules.

You said “I’d rather go in the opposite direction for debt reduction–by cancelling it and handing ownership of the assets over to the DEBTORS.” (my bolding)

Does that mean that you support all the bankrupt companies and individuals having their debts cancelled and at the same time they get the bonus of getting full ownership of ALL the assets for nothing!

An example would be John Smith deposits his retirement savings of $400k in a bank – which is then on-lent to Joe Bloggs to purchase a new home for $440k (with a 40k deposit). If Joe Bloggs loses his job and goes into default – surely you are not suggesting that his debt be cancelled and he gets full ownership of his house for free – which would then flow on to John Smith who would lose all his life savings.

My apologies for making a limited number of replies these days, but I’m finding the volume of posts somewhat difficult to keep up with while trying to do everything else as well. I do enjoy what I get a chance to read however.

On the $24 trillion issue, that is just a ballpark statement by me. The reason for it is that conventional theories of how one causes inflation–by “printing money”–and historical instances of how it is done–like Zimbabwe–are all cases in which so much money was printed and distributed that debt was eliminated by it, or the domestic debt was already destroyed by other factors. Given that the USA has domestic debt totalling about US$45 trillion, you’d need to print at least half that much to go anywhere near debt neutralisation, so that spending could be fiat-money dominated.

I very much doubt that the policy makers in the USA would even countenance a printing scheme of this magnitude. I expect them instead to make the sort of mistake Goldman is making there, of seeing this as a “rates neutrality” issue. It’s not rates neutrality that matters, so much as the sheer impossibility of the debt being paid back in a reasonable time.

As you all know, I’d rather go in the opposite direction for debt reduction–by cancelling it and handing ownership of the assets over to the debtors. Something as devastating as that is needed to make sure the “Roving Cavaliers of Credit” never come back.

This view agrees with what I am finding from Keen’s endogenous money model with a high initial debt. Even with significant cash injections to the households, wages and prices continue to fall for 10-15 years.

http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318