Chichot historii
/ 83.5.229.* / 2009-04-23 13:43
The mathematical reality is that debt taken for other than production (see constrains true economic growth. The reason is as I have noted before - nobody in their right mind will loan you money at a loss - that is, at less than the risk-free rate of return (which can be roughly approximated as the inflation rate plus a small margin, usually represented by Treasuries), with a lower boundary of zero.
Therefore as debt-to-GDP grows the amount of interest paid, which must always be greater than the risk-free rate of return, consumes a greater and greater percentage of GDP. This in turn causes the risk premium to rise since the marginal cash flow available to service debt shrinks, placing further upward pressure on true interest rates.
Machinations intended to avoid this (e.g. central bank "liquidity pumping") are ineffective as nobody will lend money at a rate less than the risk-adjusted price. If the policymakers attempt to force rates below this amount lenders simply withdraw from the marketplace and continued forced lending by the central bank does nothing other than transferring the excess loss (that is, the rate deficiency .vs. the risk-adjusted premium) to the taxpayer.
Anyone with an IQ larger than their shoe size realizes that this sort of game-playing hasn't "enhanced credit availability" at all; the actual available capital to pay interest and principal hasn't changed one iota - you've simply assessed the citizens via a back-door route, but the increasing constraint on their spending remains and in fact goes up since inefficiency increases!