From mine of 1 November:
Rising interest rates are not the only avenue by which the costs of leverage increase. As long as credit grows faster than output, the growth of credit itself increases that cost, even when interest rates remain unchanged.
From 6 November:
 |
| Debt-to-GDP, 1834-2020 |
The graph shows the size of nonfinancial debt as a multiple of the size of GDP since the 1800s:
- 1883: Debt about half the size of GDP
- 1928: Debt about equal to GDP
- 2002: Debt about twice the size of GDP
- 2020: Debt about three times the size of GDP
As
long as debt grows faster than GDP, the growth of debt increases the
cost of finance (unless interest rates fall enough to offset that
increase).
Rules of thumb: Debt always grows faster than GDP. And the cost of finance is always rising.
2 comments:
What does "nonfinancial" mean?
Looking at this graph, you might say the good economy was when the debt wasn't increasing? But that line is flat from ~1950-~1980. Most of that was good, but in the 70s it wasn't good. You can't see that transition (from good to bad in the 70s) in this graph. So maybe this graph doesn't really underlie that transition? For sure since the 1980 it's been getting worse, and you can see that in here clearly. What do you think about what was going on in the 70s?
"Nonfinancial" businesses are the ones that actually produce things. The businesses that lend us the money to buy those things are "financial" businesses.
The finance people keep the stats, and they prefer the terms nonfinancial and financial.
I prefer the terms productive and nonproductive.
productive = nonfinancial
financial = nonproductive
//
The first part of that 1950-1980 flat spot (say 1950-1964) is increase similar to the 1883-1950 increase (if you overlook the humps due to the Great Depression and WWII).
The latter part of that 1950-1980 increase is the time of the "Great Inflation". That inflation caused a big increase in the GDP numbers. (The graph uses "nominal" GDP, which increases with inflation).
Inflation made GDP increase about as fast as debt was increasing, so the ratio is flat.
The flat below the 2.0 level (roughly the 1990s) was due in part to slow debt growth during the Savings and Loan Crisis and in part to rapid Real GDP growth (but I have not checked the data yet).
The flat spot at the 2.5 level (2009-2019) I want to say was due to slow debt growth after the financial crisis of 2008. But GDP growth was slow too, so I'm not yet sure.
Post a Comment