Why Debt Matters. Was It Going Up or Down?

Why Debt Matters:  Say I borrow $10 from you. I’m in debt to you and your in ____ to me. We’re missing a word, and perhaps that’s why everyone forgets that, for the most part, we are in debt to ourselves.

Forget that China has lent us some money, that’s not our problem. So what’s wrong with owing each other money? Krugman say the problem is that debtors now feel they need to save and the lenders don’t feel like spending any extra. So, on average, people are saving more and spending less. That’s good for them individually, but it’s not good for business. Business needs people to buy things.

Going Up or Down:  Reagan said the US debt was its highest ever in 1980, and every reporter fell for this. It was true in dollar terms, but what matters is the size of the debt relative to the economy. Relative to the economy the debt in 1980 was that lowest it had been in 50 years — it was not a problem at all. Conservatives are still playing this trick. Spain’s debt  was low and falling, at the start of the recession.

Krugman’s debt model (wonkish)