Money Can Be Used To Repay Debt

Ezra Klein says the recession is all about household debt:

Atrios says “roughly speaking what happened is that the Fed gave all the Banksters a giant do-over on all of their bad bets. But the rest of us didn’t get any such do-over. If they gave us a do-over, by, say, giving everyone a 30% haircut on their debts, then people would have more money to spend.”

True. That said, there’s no compelling reason to think any such bailout needs to be specifically targeted at the indebted. The politics of that might be bad. But if household debt is 90 percent of GDP and things would be better if it were 20 percent of GDP, and US GDP is ~$14 trillion, then we’re looking at roughly $2.8 trillion of desired debt reduction. That comes out to roughly $9,300 per person. You could give each American a platinum coin with $9,300 written on it. Indebted individuals inclined to use the coin to reduce their debt would be free to do so. Others would save the money. I, personally, would likely spend it on home audio equipment. The value of the dollar would decline, and net exports would increase. I think the expectations equilibrium around slow growth would switch to a healthier one. Presumably in the future, people would become more reluctant to loan money to U.S. households, which would crimp our living standards in some ways, while perhaps making us less likely to repeat the debt binge experience again.