INTRODUCTION
This short introduction is centered on organizing thoughts at an abstract but simple level on the difficulties of reducing debt and on presenting data on debt in Portugal. Models where debt is contracted to leverage acquisition of assets have a long tradition in the history of economic thought1. J.S Mill, Alfred Marshall, Knut Wicskell, Irving Fischer, Hyman Minski, all have developed models where excessive leverage ultimately creates troubles to the real economy. Knowledge of this class of models should stimulate the adoption of ex-ante rules and policies aimed at taming the build-up of excessive leverage to avoid the subsequent possibility of troubles as for example in Farhi and Werning (2013). Historical and contemporaneous evidence however shows that measures aimed at reducing the level of debt need to be adopted after the troubles have spread to the real economy. A central point that makes an excessive level of debt a problem is the heterogeneity between creditors and debtors. In a closed system such as the World or a closed economy, the liabilities of the debtors equal the asset of the creditors. In such a simple system a mandatory reduction of the debt can occur only through an arrangement between the debtors and the creditors. The creditors must concede time to the debtors to produce the resources to repay them or must be willing to renounce at least partially to their credits. When a government who controls monetary and fiscal policy is also present in such a system, he can engineer the reduction of debt. Using monetary policy the government can reduce the value of debt and assets using inflation, namely changing the value of the unit of account. The government can also engineer a redistribution through taxation. Ultimately both measures shift resources from the creditors to the debtors. In practice governments also engage in the accumulation of assets and liabilities both for productive and intra and inter-temporal redistribution motives. A fourth class of agents, the financial sector, intermediates the debt and credit transactions between the private creditors, debtors and the government. As long as the system is closed and the authority of the government is not questioned the resolution of a de-leveraging (through a reduction of debt) is ultimately a credible outcome. When the system is open and starts to borrow and lend outside of its monetary and fiscal boundaries the redistribution solution, coercive or not, by his government ceases to be possible and the resolution of the de-leveraging becomes a more uncertain outcome.
