On the Use and Abuse of Debt

Debt plays an important role in the US economy (and the world economy for that matter). It's actually a very interesting social arrangement. I highly recommend David Graeber's book - Debt: The First 5,000 Years - if you're interested in exploring debt from an historical/anthropological perspective.(I may discuss this in a later post if I get around to it.)

Today I won't be questioning the existence of debt relations but will take them as given. The question here will be this: is there a sensible way to deal with debt?

The Dollar is an Excellent Store of Value

To start off, I don't believe the title of this blog, at least not in the usual sense of how the dollar is defined. I would like to suggest, however, that the dollar has been, historically speaking, a good store of value. Whether or not it will do be so in the future is anyone's guess.

If you've ever had the "privilege"  of reading an economics textbook, it will give you a functional definition of money - money is defined in terms its functions. For example, according to the wikipedia article on money, money serves the following four functions:

1. Medium of Exchange
2. Unit of Account
3. Store of Value
4. Standard of Deferred Payment

The article notes that many economics texts do not list "standard of deferred payment", instead, treating it as parts of the other functions.

As far as the dollar is concerned, it's frequently acknowledged to satisfy 1, 2 an 4 but not 3.  I can use dollars to make all sorts of purchases (medium of exchange), all of the goods and services and debts are denominated in dollars (unit of account) and all of my debts can be dispelled by the use of dollars as a result of legal tender laws (standard of deferred payment).

But regarding store of value, the dollar has not served so well. As I illustrated in Figure 2 from my blog on Currency and Price Stability (reproduced here), the dollar has lost a significant amount of purchasing power over the years.