That dose of debt not to be exceeded

Debt is like wine: in moderate quantities it is good for you, too much is bad. Or, if you like, it is like dynamite sticks: if you don't know how to use them they cause disasters, but if you handle them carefully they are useful (as in mining or demolition).

Imagine if there was no debt: many families would not have been able to buy a house, and the same goes for many purchases on instalments. But what is the line between moderate and excessive amounts? When does a debt become unsustainable? The answers to these questions differ depending on whether the debt is public or private. In the first case, the state - which includes the legislative, executive and monetary (central bank) powers - has the 'St Patrick's well' of money creation at its disposal. It can always pay its debts by printing money, even if this horse cure has numerous drawbacks. Private individuals, on the other hand, have no St. Patrick's well in their backyard and sustainability must be assessed by other criteria.

The borderline between balanced and exaggerated amounts of debt for individuals depends on individual factors such as income, savings and future stability, but there are no universal predefined thresholds. A debt becomes unsustainable when instalments exceed the ability to pay, risking default or over-indebtedness. The sustainability assessment should therefore be done in perspective, with a projection into future years. For example, when a child is born, family consumption increases by more than 40 per cent according to Istat data. In that case, will the mortgage payment that was sustainable in the absence of the child still be bearable? And again: if when we retire, incomes drop, will the mortgage payment still be sustainable or will it be critical? These questions should be considered before taking out a loan. Even when an enticing zero-interest Buy now pay later is proposed.

Then the macroeconomic context in which we live also comes into play. Honouring the debt means paying interest and repaying the principal. As far as interest is concerned, the crucial variable is the level of interest rates. And monetary policy can improve the sustainability of private debt if it keeps interest rates low. With regard to capital repayment, the issue is more complex. Here the inflation variable comes into play. If the inflation rate is high - which would mean that both prices and wages grow at a rapid pace - then it becomes 'easier' to repay the debt (which remains fixed in nominal value from the moment it was contracted): the capital instalment becomes a smaller share of a growing income.

It would therefore be easier to honour the debt if interest rates are low and inflation is high. The problem is that usually, when inflation is high, rates are also high. It is therefore not easy to identify the red line not to cross and when in doubt, better not to overdo it.