Many years ago, in the early days of internet banking, your pie maker accidentally discovered how to cause a financial crisis while getting free services. It works in three steps:
(1) Sign up for a service with a month bill paid automatically from a checking account
(2) Set up "Overdraft Protection" on the checking account from a line of credit (LOC), aka "credit card"
(3) Set up the checking account to automatically pay the minimum payment on the LOC
Each month, the service provider (SP) permitted your pie maker to use their infrastructure in exchange for a small (but slowly rising) fee assessed after the service had been used. In other words, if your pie maker decided to be a delinquent, the SP was screwed unless it had some kind of recourse. Any resources expended on your pie maker's behalf were aquired with someone else's investment, hopefully at less cost than your pie maker's fees, otherwise the system would be unsustainable from the outset.
At the end of the month, the managers of your pie maker's line of credit issued a "cash advance" on which they charged interest and for which they deducted a fee. This "cash" was used to pay the SP for services rendered, and your pie maker was permitted to continue using the service the next month. A few days later, the LOC's managers again issued a "cash advance" with fees and interest to pay the minimum amount due on the LOC.
This only lasted a couple months before your pie maker's mail finally caught up to him and he promptly cancelled both the service and LOC. Following a Nassim Taleb-esque master narrative on debt, especially consumer debt, coupled with lessons drummed in from childhood, there seemed to be nothing good about having a "free" service that was going to force him into default or substantial reduction in quality of life in a predictable, if distant, time frame determined by the maximum allowable balance (i.e. debt ceiling). The SP's investors were unhappy to lose a revenue-generating customer and the bank was unhappy to lose a lucrative asset, but the beauty of our system is supposed to be that we can each work to our own best interest, and the service wasn't needed. Austerity is often good for the soul, and a PMCIN=1 lifestyle doesn't require many services.
The obvious regulatory response is twofold: (1) tax interest on rolling credit more heavily to discourage its issuance and (2) prohibit the use of rolling credit to pay for rolling credit. (i.e. once a checking account is "secured" by a credit card, it can't be used to automatically pay that bill or pay it all unless there's been a deposit equal to or greater than the credit card bill payment). This would lead to a much larger number of small defaults, fewer bankruptcies, and more stable economic growth.
Given the demographics of post-modernists, it's unlikely they'll try to hard to smash this anti-finance narrative, but let's give it a go. First of all, in this circumstance the cost of losing the service was a minor inconvenience to your pie maker, but what if instead it had been something vital, like, say health insurance. In that case, breaking the cycle would have required your pie maker to find additional revenue to both cover the cost of the formerly "free" service and the interest payments on the debt due to both the service costs and fees. So instead of putting all of his salary into the local economy, plus providing a conduit for global investors to do so as well, your pie maker would exert a deflationary influence that hurt not only local merchants and workers but also the SP's investors, the LOC issuer's investors and his own standard of living.
In fact, given your pie maker's excellent credit rating, loans to him could be highly rated and thus have tiny reserve requirements. If the employees of the bank who collected those fees deposited or invested their money in the same bank, 90-98% of the that money could have been immediately be reissued to your pie maker to cover the next month's expenses. Assuming the SP had covered all of its capital costs and was simply paying off its employees investors with your pie maker's monthly installments, those investors could turn around and reinvest those returns in CDOs, ETFs or other instruments that allow the bank boost its assets by lending yet more SP payments and fees to itself. Since the LOC is such a little money spinner, why not leverage it a bit and borrow against future payments that the highly rated pie maker is sure to provide?
In other words, the real problem here is not debt itself but the debt ceiling and "leakage" from the system. Your pie maker should absolutely not live a more austere life of baking and biking, instead he should maintain the LOC and "free" service, while devoting any income gains to the CDOs and ETFs that allow him to, effectively, borrow money from himself and collect interest on it. The bank needs to be allowed to have very generous capital reserve ratios, and taxes must be as low as possible to ensure that money issued as bonuses, disbursements or dividends can find its way back into the lending pool. The "pro-growth" policy response is absolutely not to limit consumer's ability to hurt themselves and bank bondholders, but instead to ensure that the circular flow of money has few leaks as possible due to taxes and payments to people outside the investing class. The optimism, the belief that any bank instrument will yield positive returns, underlying this system must be maintained at all costs. The growing rich-poor gap is a sign of this system becoming more stable, or at least entrenched.
Of course, the problem with this system is that some leakage is inevitable. At some point, your pie maker and his bank will have exhausted all of the optimism available, and some of those investors will want to realize their gains in tangible assets. At that point, either everyone, investors, banks, pie makers, governments, etc. suffers massive loss of wealth (since the circular flow meant there was never any real money involved) or someone steps in and buys your pie maker's debt with "real" money. Paging
Uncle Ben . . .
Your pie maker abandoned the investor-funded lifestyle several years ago and now lives off the largess of people who want better robots. Most governments, however, have not made this choice, and instead find themselves constantly looking for ways to increase the assets of the currently wealth in exchange for the ability to provide services (like medical care and security) to their populations. By structuring their credit systems, labor laws and production systems to funnel consumer funds back into investment vehicles they have been able to close the loop pretty well, and since sovereign debt can be paid coercively (i.e. taxes), their "credit limit" is a very flexible concept.
However, this can't go on forever. Eventually, the optimist assumption about the quality of the debt, or at least the currency in which it was issued,
will fade. But unwinding this situation will be incredibly difficult because most of the income that pays for the debt today is itself borrowed money, and liquidating those assets will reveal, as in your pie maker's case, that there is little or no real money, just a lot of promises (consider one's own bank account at an institution with a 10% reserve ratio). The next budget fight will be vicious, full of powerful buzzwords, and require the very best in careful accounting to parse its implications.
