Not all debt is bad. Two obvious points here. First, as much as we like to criticize financial markets for their excesses, we cannot forget that financial development is key to economic development."Financial development is key to economic development." That's his first point. Okay, so let's suppose Fatas is right. How do we explain this:
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| Graph #1: Private Non-Financial Debt as a Percent of GDP (Data copyright BIS) |
Debt increased more than three times as much as GDP, all told. In other words, financial development led to one third as much economic development. Financial development is the muscleman, and economic development is the 98-pound weakling. That's how I explain it.
Here are his next two sentences:
There is a very strong correlation between GDP per capita and measures of financial development. And a common measure financial development is the ratio of debt to GDP.The ratio of debt to GDP. We looked at that. Debt increased three times as much as GDP.
One more sentence from Fatas; again, his next sentence:
Higher debt means financial transaction that could not have occurred otherwise.An increase in debt means financial transactions that could not have occurred otherwise. All the rest of the debt, other than the increase, supports the existing level of economic activity, which should really be supported by money that doesn't have the interest cost.
Part 2 of 3
4 comments:
Art
"Debt increased more than three times as much as GDP, all told. In other words, financial development led to one third as much economic development. Financial development is the muscleman, and economic development is the 98-pound weakling. That's how I explain it."
Well I suppose if most of your debt composition is for housing this should not be very controversial. Much of it is to purchase existing housing which does not generate much GDP expansion.
The purchase of existing homes can be seen as a grassroots financial assistance program for people who are selling their old homes and buying new. A natural response, in part to slow wage growth and in part to home prices rising because of all the mortgage lending.
Hold on, let's look at that.
It is true that since the year 2000, or perhaps since the year 1985, home mortgage debt has been at a high level relative to GDP. However, When you look at home mortgage debt as a percent of total credit market debt, mortgage debt was low and stable. The 2006 peak is within 2 percentage points of the peaks of 1965 and 1980.
It isn't mortgage debt that's the problem. It's the high level of debt everywhere.
Art
If you are going to compare Mortgage debt to a Broad Credit Index which includes all of these measurements you should use MDOAH and not HHMSDODNS. I think you are missing about 4 Trillion in Mortgage Debt Outstanding and I would disagree that you should also include Federal State and Local government in your analysis.
https://fred.stlouisfed.org/graph/?g=iRo2#0
+ FL144104005.Q Nonfinancial business; debt securities and loans; liability
+ FL154104005.Q Households and nonprofit organizations; debt securities and loans; liability
+ FL214104005.Q State and local governments, excluding employee retirement funds; debt securities and loans; liability
+ FL314104005.Q Federal government; debt securities and loans; liability
+ FL413065005.Q Agency-and GSE-backed mortgage pools; total mortgages; asset
+ FL264104005.Q Rest of the world; debt securities and loans; liability
+ FL404104005.Q Government-sponsored enterprises; debt securities and loans; liability
+ FL614104005.Q Finance companies; debt securities and loans; liability
+ FL704104005.Q Private depository institutions; debt securities and loans; liability
+ FL674122005.Q Issuers of asset-backed securities; debt securities; liability
+ FL644104005.Q Real estate investment trusts; debt securities and loans; liability
+ FL543169373.Q Life insurance companies, general accounts; FHLB advances; liability
+ FL664104005.Q Security brokers and dealers; debt securities and loans; liability
+ FL734104005.Q Holding companies; debt securities and loans; liability
+ FL504104005.Q Funding corporations; debt securities and loans; liability
+ FL513169333.Q Property-casualty insurance companies; FHLB advances; liability
Good Mnemonic! MDOAH... I remember it already. Thanks.
"I would disagree that you should also include Federal State and Local government in your analysis."
Federal debt & private have different effects on the economy, I know. However, government debt still has a cost. That's why I include it in the broad measure.
But even if I look at it your way, mortgage-to-broad debt from 1951 to Q3 1993 is higher than the 2006 peak. That's 42 years it was above the 2006 level, without a "Great Recession".
In 2006, mortgage debt was pretty low, relative to broad debt. If mortgage debt is too high, then surely broad debt must be too high.
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