In my previous posts, I have outlined the problem, what went wrong, and how we got to that point.
So how do we fix it? Below a list a host of things that need to happen, the problem is all of these don’t happen overnight and take time. How much? I am not quite sure.
- Consumers and financial institutions need to get back to sustainable debt levels. Inflation and write-downs can help with this.
- The consumption economy needs to shift into more production and exporting.
- Borrow less, spend less, and save more. Capital saved now can be invested in the future.
- Regulators need to make sure the system that lead to the collapse is no longer in place, and find a way to assure this system or another can’t be recreated.
It’s not a welcome answer, but it’s the only way we can cure our debt problem. It’s going to be no easy task, but once the aforementioned items are accomplished we should have a launching pad for more sustainable, steady growth (and subsequently more stable markets). Balance sheets will be cured and responsible, modest loan supply and demand will return. The private sector will then be able to be self-sustaining.
That is why I am a proponent of fiscal support. As the private sector continues to deleverage, that growth will need to be made up somewhere or the economy as a whole will contract. This is where the federal government can step in.
Of course, whether or not they will spend wisely and make investments that will lead to future growth is entirely debatable.
