The cause of current anemic GDP growth is evident from the recently-released Z1 Flow of Funds report. GDP recovery from 2008/2009 is accompanied by only a modest rise in Domestic (Non-Financial) Debt — which is now constraining further growth.
Domestic (Non-Financial) Debt is made up of Government Debt and Private (Non-Financial) Debt — which can be further broken down into Household and Corporate debt. The Financial sector is excluded as it mainly acts as a conduit, channeling debt to other sectors of the economy. We can see below that Private (Non-Financial) Debt contraction was far greater than overall Domestic (Non-Financial) Debt. What saved the economy was a sharp spike in Government Debt in 2009, offsetting the fall. The massive fiscal deficit may have left a public debt hangover, but failure to offset the contraction in private borrowing would have had more serious consequences: a GDP collapse similar to the 1930s.
Resumption of corporate borrowing has dragged Private (Non-Financial) Debt growth into positive territory but growth remains anemic and households continue to de-leverage. Cessation of government borrowing would cause a fall in overall Domestic (Non-Financial) Debt growth to near zero and a sharp fall in GDP. The economy needs to be gradually weaned off stimulus spending in order to minimize disruption to growth. And not before Private sector borrowing recovers. We need a clear deficit-reduction plan, over 5 to 10 years, in order to restore corporate sector confidence and encourage new capital investment.
The only alternative is further quantitative easing (QE3), where continuous deficits are funded by borrowing from the Fed. But that poses a whole new set of problems — and could lead us back to square #1.
I find your implication that you cannot have an increase in GDP without an increase in debt shortsighted and the cause of our current problems. If people choose to borrow for whatever purpose that is there right. However, people spending money does not require an increase in debt. Spending money at a more rapid rate will cause an increase in the velocity of money, which will increase the GDP.
And most importantly, a decrease in the GDP is NOT a bad thing if it means people stop paying foolish prices for houses and cars or other items.
Jon, It is not an implication but an observation: expanding debt signals rising GDP, contracting debt indicates falling GDP. That does not mean we can solve our current problems (too much debt) by adding more debt. That is likely to cause inflation rather than GDP growth. We also cannot solve the problem by reducing debt — that causes deflation. We have to aim for maintaining existing debt levels while encouraging real GDP growth. Difficult but not impossible. Read Mark Carney’s recent presentation for a more detailed discussion.
Jon with respect, you’ve confused the implication for the mathematical fact. All money is created from debt – either first hand from sovereign fiat currency or second hand from private debt creation by the banks (there’s no such thing as fractional reserve, its zero reserve banking). This is empirically proven.
However, you are correct that private savings – which is accumulated public debt – i.e sovereign fiat currency created in previous years – held by citizens can then be spent to create aggregate demand in the economy and hence boost GDP.
The question is is GDP a good measure of economic prosperity? No not really. But the maths are clear. Look also to Steve Keen’s debt impulse work, where the acceleration in debt creation effects the change in GDP.
I’ve got a question – how to interpret the recent increase / first lending and increasing the monetary base /- a small increase but it is – whether you think it is a seasonal increase trailer or improvement?
Also increase Asset-Backed – decrease the comercial paper / financial /
Well, but generally the first time in many months is in the risen !
I think it might be / if it proves not only the loan Christmas / start to improve –
but not quite know how to interpret.
sorry for my english
best regard’s
jurek