Arm Chair Economics

So E poses the question: What would happen if everyone started paying off their consumer debt all at once?

Would inflation happen? Nope. The amount of money isn't increasing, only the what the money is being used for.

Would a recession happen? You betcha. Consumer spending would decline steeply, and quickly. Not only would credit card financed consumer spending stop, but so then the money used to pay off the debt would also exit the consumer spending realm. We'd see a decrease in demand across the board for nearly everything leading to a dropoff in output and employment.

But that would be the short term pain. The long term gain is that banks would be flush with capital they would need to lend, and they'd have to find a productive way to lend it, rather then lending it for consumer spending at high interest rates. It is likely you would see the beginning of a boom cycle as access to capital would open to all kinds of companies and entrepreneurs. This would of course lead to more jobs, more income and more spending.

Also, in the long run, as people became debt free, they would be able to put a higher percent of their income towards purchasing, helping create demand for all those new companies. Right now plenty of income is being spent on paying interest on consumer debt - not actually purchasing goods.

To summarize, banks lending capital for consumer purchases does little to increase our means of production, and in the long run, saps the purchasing power of the consumer. Eliminating consumer debt would cause a short term disruption in the economy, but would lead to a long term economic boom.