Dear Reader,
Imagine an economy in which there is no debt: the only way to spend more is to earn more, and the only way to earn more is to become more productive. Over time, as our cumulative knowledge grows, we improve systems, we discover better ways of doing things, and we become more productive. This raises our incomes, allows us to spend more on consumption and investment and raises our living standards. Which is how the economy moves forward.
But, when you introduce credit, debt and borrowing to an economy, you create cycles as you have another way of increasing spending now that will, in turn, reduce spending in the future. If this borrowing is used to finance improvements in productivity, and thus increases in income that can be used to pay down the debt, then capital has been allocated efficiently and the economy will grow faster than it otherwise would have.
If this borrowing is used to finance consumption or doesn’t improve productivity, and thus no increases in income, then …