Catch-22

In the Billy Blog of May 9th, 2011 we read

But the “Great Moderation” overlooked that asset prices were increasingly not sending satisfactory signals to entrepreneurs interested in investing in real productive capacity and thus distorted the use of investment funds towards speculative financial assets.

Moreover, with aggregate policy now maintaining a buffer stock of unemployment to discipline the inflation process and fiscal policy behaving in a largely passive manner (to support the “inflation first” monetary policy ideology), economic growth became increasingly dependent on credit growth to drive mass consumption.

"Economic growth became increasingly dependent on credit growth to drive mass consumption."

Well, sure. I'm always complaining about debt, right? But look at this picture:

Graph #1: Total Debt and the Exponential Pattern

Debt growth is exponential. There was no sudden increase in debt. There is no change in the trend that we may attribute to the fact that "economic growth became increasingly dependent on credit growth." Credit growth was always increasing.

If there is debt, then there are borrowers. To blame the borrowers for the debt -- or to blame the lenders, for that matter -- is to miss the point. The point is, everything depends on policy, and policy says use more credit.


"Asset prices were increasingly not sending satisfactory signals to entrepreneurs interested in investing in real productive capacity."

Well, sure, again. Robert Brenner attributes our economic malaise to "a deep, and lasting, decline of the rate of return on capital investment since the end of the 1960s" -- the 1960s -- a decline brought on (in my view) by the rising cost of interest and the increasing reliance on credit. By the 1970s our economy had already lost its luster.

What happened next was policy. We enhanced the supply side. But we continued to build growth upon credit. We continued to increase the factor cost of money. Therefore, "real productive capacity" continued lethargic. Only finance was robust.


The problem today is debt.

The problem that caused the problem, is excessive credit use.

The problem that caused that problem, and continues to cause it, is economic policy that promotes credit use above all else.

Policymakers have flies in their eyes, but cannot see them because they have flies in their eyes.