Sunday, December 21, 2008

Can debt replace productivity to spur growth?

Economic growth appears to be the single issue that has banks and senior banking institutions around the world scrambling for solutions to what seems to be an impossible goal.

It may be, however, that growth for growth's sake itself is the problem. Where actual demand exists productivity is increased to meet the demand. Where demand falls it may advisable to allow productivity to decrease in a natural course, thus creating a natural balance between the two.

Spending via debt clearly has the world institutions following one another like sheep down an endless path of debt from which there can be no return. Corruption and greed has not helped. The again corruption and greed are not the exclusive to the so called fat cats and CEOs of the corporate giantalia. Debt, as some auto manufacturers for instance are about to find out, is a last resort. Productivity and innovation should come first. The bailout mentality could be a recipe for disaster.

It is interesting to note that Ford is not banging quite as hard on the Federal Bank vault doors as say GM or Chrysler. Were Ford to survive 2009-10 without a bailout package it would doubtless come out ahead of GM and Chrysler as it would not be saddled with debt, but rather rely on its ability to produce than its ability to borrow.

The principle of 'productivity over debt' could be applied to all industries in all countries. The consumer has been conditioned much like Pavlov's dog to continually increase his debt load in the name of growth. In countries where this conditioning is not as prevalent one sees less negative impact on the national banking system and national debt. This is such a simple principle and often the choice of many individuals who need to make household financial decisions on a daily basis. Governments have to make similar decisions, but as we see today, for the most part sovereign states eschew productivity for debt.

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