Global recession is an event where customer, unable to find or generate more money, demand are falling. therefore, government should find a way to increase customer money, such as easy loan, lower interest rate to encourage household to buy rather than to save. if they need money, then all the need to do is borrow the money. then gave it to central bank which will distribute it to private bank and later gave it to household in form of consumer loan. that's it. people need money to buy new TV so gave it to them. more transaction mean more tax. this increase in tax will gave boost to government revenue so they can used it to pay loan. or in this case, bought more loan.
The rather disturbing narrative above is what most Keynesian subscribe today... they believe that a quickest way to increase economic activity or GDP is to increase liquidity and the quickest way to increase liquidity is to increase the availability of money and loan is the quickest way to increase money.. after printing the money, of course.
Now don't get me wrong. i consider myself as Keynesian i agree that liquidity is the most important factor in economy and money availability is the biggest factor that influence it. i also agree that debt, more specifically national debt, is important in order to ensure the availability of money. however one thing that i disagree with many Keynesian researcher is their dependence on consumer loan to increase liquidity. that insane.
Debt is the amount of money that you borrow from other because you are confident that in future, the economic growth from the usage of money will gave you an increase in income, therefore you will able to pay the debt. it's like you borrow money to open new store. the new store will gave you increase in income so you will be richer than before and you able to pay the money you borrow with the new revenue.
However, consumer loan is a debt you take in order to consume something and it probably in form of new TV, car or house. that is a debt that you will paid using your future income which i highly doubt that will increase because your of new B.M.W.
By now you should notice the difference between two loan. so let's discuss it even further. let see how they will affect the GDP.
GDP or gross domestic product is a measurement of one nation economic activity. for example, nation A had two people called joe and sara. joe purchase an apple from sara at cost of 5 dollar and sara purchase a banana from joe at cost of 5 dollar therefore GDP of nation A is 10 dollar.
These two loan will contribute to GDP in it's each own way. the first loan, let's call it investment loan, will boost the economic growth by creating more jobs, more shop, in other word it will increase the GDP by boosting the supply side. the second loan or consumer loan will increase boost the GDP by increasing the sales of product or it will increase the GDP by boosting the demand side (people had more money to burn hence they will demand more goods). it fine since both of loan contribute to economic from two side of economic, the supply and demand sides.
Let's elaborate it a further more. every loan had a risk where the debtor will not able to pay their loan or solvency risk. in investment loan, the solvency risk lies happen because the investment failed to increase income, perhaps because bad decision making or any other factor. in consumer loan, the risk of insolvency happen when the debtor is run out of mean to pay their loan, maybe because they got fired or laid off. in these sense, the risk of both loan lies in ability to predict future, be it from creditor side or the debtor side.
The difference is, while investment loan is driven from desire to generate more income, thus if success will lead to increase in demand, the customer loan is driven from desire to acquire more luxury. while it will boost the demand or economic activity, the customer loan had no direct effect in affecting the supply. investment loan will, no doubt, boost increase in job opportunity and spread the wealth even further among the people via wages. consumer loan only affect the user.
Now here come the problem with Keynesian they consider an increasing in GDP is an increasing in economic activity. and if the government able to increase economic activity then the government is in the right track. let's forget that GDP consist of real GDP which represent the economic activity from real sector. as long as people keep buying then the economy will keep running, so let's decrease the interest cost and force the bank sales people to distribute more loan. don't worry they won't be so reckless in giving debt in order to meet quote.
yeah right, so U.S sub prime mortgage crisis is happen for entirely different reason than bank failure to choose the right debtor oh and while we're at it. Greece and Cyprus crisis is happen because other reason as well. there is no way bank had anything to do with three greatest economic crisis in century.
I've long had an opinion that true indicator of economic growth not lies in how much we buy but in how much we produce. some consider that i had an century long view of how economic should run. well yes, at least east India trading company is bankrupt due to bad decision making, not because their consumer failed to pay their installment. i consider that increase in productivity worth more than increase in consumption, particularly if increase in consumption are driven from loan.
consumer loan lead to consumerism, an act of living beyond one means. i believe that if one want something, he or she should work for it. not borrow money for it. people start to forget how it feel to save money. this is not an habit that we should encourage.
if government truly care's about it's people. it will do whatever it takes to make sure that their people had a mean to put food on the table. the best way to do this is by providing jobs and perhaps, security. not by encourage people to borrow money to purchase new table.
