Paul Krugman's column today is headlined Nobody Understands Debt. I think he may really mean nobody else, but:
...You see, policy makers have been basing their actions on a false view of what debt is all about, and their attempts to reduce the problem have actually made it worse.
First, the facts: Last week, the McKinsey Global Institute issued a report titled “Debt and (Not Much) Deleveraging,” which found, basically, that no nation has reduced its ratio of total debt to G.D.P. Household debt is down in some countries, especially in the United States. But it’s up in others, and even where there has been significant private deleveraging, government debt has risen by more than private debt has fallen.
You might think our failure to reduce debt ratios shows that we aren’t trying hard enough — that families and governments haven’t been making a serious effort to tighten their belts, and that what the world needs is, yes, more austerity. But we have, in fact, had unprecedented austerity. As the International Monetary Fund has pointed out, real government spending excluding interest has fallen across wealthy nations — there have been deep cuts by the troubled debtors of Southern Europe, but there have also been cuts in countries, like Germany and the United States, that can borrow at some of the lowest interest rates in history.
Krugman interprets misguided policies to faith in a bad analogy between individual family finances and national finances, but I think he misses a key point - austerity and deflation may be bad for the economy as a whole and for individuals on average, but not for every individual. In particular, deflation enriches rentiers at the expense of debtors.
Debt has long been a key tool for keeping the poor downtrodden. Austerity not only keeps the European periphery in its place, but also keeps German workers underpaid, while maintaining a large group of unemployed to keep reminding workers of their place.