- Individuals can transfer consumption from the future to the present by borrowing money from other individuals. But there is an entry on the other side of this ledger - the lender is transferring their own consumption from present to future. The net effect on the whole system is nil.
- Countries can do the same - if America (or American people) borrows money from China (or Chinese people), they can move today's consumption from China to the US in return for moving tomorrow's consumption from the US to China (assuming China can enforce this promise in the future). But the whole world cannot.
- In the long run, debt (and especially writeoffs of debt) can change incentives, and this could affect the ultimate capacity of the economy. But this fact does not tell us what the optimal level of debt is, or how or by whom it should be held. Perhaps 300% of GDP is a better level of debt than 100%, and either is probably preferable to zero. Debt does give a way for different production and consumption choices to be made than would be available without debt, and this can enhance the efficiency of the economy (see the Megan McArdle link below).
But debt does not intrinsically favour either investment or consumption. Debt is not the problem here. Productive (i.e. nonresidential) investment did not grow strongly between 2001-07 in Western economies, though it did exceed the rate of economic growth and was immense in China. I have not been able to find a worldwide figure so any contributions would be welcome.
- a coordination problem between the component parts of the economy
- a confidence problem which results in self-feeding reduction in demand and utilisation of capacity