Saturday, January 23, 2010

Simon Says...

Allow me to repeat part of Simon Johnson's statement (from Thursday's post):

The issue is not finance per se, i.e., the process of intermediation between savings and investment. This we obviously need to some degree. But do we need a financial sector that now accounts 7 or 8 percent of GDP?

In other words: We need finance. But we don't need it to be such a big part of our economy as it is today.

I agree.

Here, from a year-old post by ContraHour on Seeking Alpha, is a glance at how big finance has become:


The topmost trend-line shows the accumulation of total debt. At the right-hand side, the next one down from the top is "Domestic Financial," equivalent to Simon Johnson's "modern finance."

At the right-hand side, the most recent numbers show domestic financial debt is the biggest component of the debt. At the left-hand side, the oldest information shows domestic financial debt as the smallest component. Clearly, domestic financial debt has been the fastest-growing component of debt.

Finance is the cancer.

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