Between debt and the devil: beyond the normalization delusion

Since 2008, we have found it incredibly difficult to achieve adequate nominal demand growth. I think a fundamental reason we found it so difficult focuses on debt overhangs, if we first allow private leverage to grow too high, we end up in a situation where the debt doesn’t go away, it just moves around the global economy. Total global debt to global GDP is now higher than it ever was before. When interest rates are already low, further reductions of interest rates have very little influence on investment and consumption. Ultra-loose monetary policy does produce increases in asset prices. But if that’s driving an increase in inequality on top of slow growth of real wages. There has been inadequate focus in economics on the different functions that credit creation plays within the economy. We have to think about control of the credit cycle as an end, per se. Our orthodoxy before the crisis was that private credit and money creation is just fine. We have to understand that both governments can fail and be dangerous, and that markets can fail and be dangerous.