Economic Lunacy - Avoiding Recession by Increasing Debt

The economic good times we’ve been enjoying for the last decade or so has (arguably) been driven by the willingness of the US to go into debt. It’s certainly been good for Australia as we sell increasing amounts of raw materials to China to be manufactured into the goods that the Americans haven’t got the funds to buy.

A lot of experts have been sanguine about this situation, reasoning that it’s ok as long as the US can service the repayments. That, though, was before the Sub Prime lending fiasco, which threatens the foundations of the US economy. Worryingly, the US reaction to the Sub Prime crises is more of the same.

The fear of going into recession is understandable. However, it seems stupid to risk a much more serious consequences down the line by propping up the bad debts that caused the problem in the first place. Reducing interest rates and providing tax handouts will only make the debt problem worse. At some stage, US creditors are going to move to protect their money. If that happens in conjunction with rising energy prices, the recession we're desperately trying to avoid would have seemed very mild indeed.

Footnote: It’s interesting to note that the first dip in the graph above was a result of Ronald Reagan’s economic policies, and the subsequent recovery was the work of that “liberal” president, Bill Clinton. Who said conservative’s make better economic managers?