Thursday, February 2, 2012

Private Debt 2012 (5): Consumer Credit

The log scale does what? I forget. Shows the growth trend, or something, right?

Graph #1: Total Consumer Credit Outstanding (Log Scale)
When did consumer credit grow at its fastest? Immediately after World War Two.

When did consumer credit growth stabilize? Mid-'50s. After that, it's a straight line.

When did consumer credit growth slow? Oh, 2008 and since. But you know that. Also, briefly, around the 1990 recession. I've pointed to that time before, a time when slack was created in the financial system.

So now... If we say private debt is the problem... The question is: When did the problem start? Not in the '80s. Not in the '70s. In the '70s it hit the fan, and in the '80s we fixed it the wrong way. (Obviously, nobody tried to slow the growth of debt in the '80s.)

If debt is a problem, then the growth of debt is a problem. And that problem started immediately after World War Two.

Here's the same info, Total Consumer Credit Outstanding, shown this time as a percent of GDP:

Graph #2: Total Consumer Credit relative to GDP
Again we see the dramatic post-war increase, and an abrupt end to that increase. This time the change occurs in the mid-1960s, around the time of the long forgotten "near-recession" of 1966.

After that, the line trends flat until the early 1980s. Probably this is due to the rapid inflation of those years, which increased incomes and increased the size of additions to consumer debt, but made existing debt balances relatively smaller and easier to pay.

If it was inflation that changed the trend, or even if it wasn't, clearly there was a trend-change in the mid 1960s. My argument would be that already by the mid-1960s we had so much debt that the growth of debt could not continue apace, but had to slow. And also that it was causing problems like inflation.

Some things cannot be said often enough. Excessive private debt is the problem.


LiminalHack said...

"If debt is a problem, then the growth of debt is a problem. "

Equally, if debt is not a problem, then the growth of debt is not a problem.

The essential problem here is not whether a modern economy operates on a monetary system or on a credit system.

The problem arises when you actually have a credit system which is perceived as a money system, or vice versa.

If a medium of exchange is to be electronic, then there are but two options:

1) You have a **credit** system in which all units of the medium of exchange must exist as a credit/debit pair on balance sheets.

2) You establish some cryptographic scheme (like bitcoin) which allows a given unit of the medium of exchange to exist as a number which can't be double-spent. Then some collective authority issues these units, or retires them, and somehow administers a double spend database.

Because if there's balance sheets involved in the base money units, then it's debt, by definition.

The Arthurian said...

Hi Liminal. I don't object to the WORD debt. I object to the cost of using money being so universal that it competes with wages and profits.

Greg said...


Bill Mitchell puts M1,M2 and M3 into an MMT perspective here

thought you might find it interesting

LiminalHack said...

Well like I said, either electronic money is a binary object involving two parties in its creation and thus having the costs of use determined by those two parties, or electronic crypto money is used which is issued and managed by one party who solely determines the cost of use.

Ultimately a technology (which is what we are talking about here) designed to work around a lack of trust between parties who would otherwise not trade, must have some costs, somewhere.

Or are there free lunches?

The Arthurian said...

And yet, there are debit cards.

You try too hard to imagine the future. I have no faith in prediction.

The costs that you imagine are upon us today, and have been causing troubles since the 1970s. Nonetheless, the rate of interest is a variable. And the reliance on credit is a variable. And the factor cost of money is a variable. And should it fall to a low enough level, the economy can recover and things can be as they were before, growth and optimism.

Paper money is less intrinsically costly than gold; electronic money is less intrinsically costly than paper.

LiminalHack said...

"Paper money is less intrinsically costly than gold; electronic money is less intrinsically costly than paper."

paper money is intrinsically more complex than gold, and electronic credit/debit money is more complex than paper money.

Maybe the rising costs of money generally are a result of diminishing marginal returns to additional complexity (see Tainter).

jim said...

Hi Art,
The preoccupation with the cost of credit seems odd to me in a world where the cost of credit is at an all time low and falling.

It is true that for several decades the cost/benefit analysis of credit has been badly bungled on a grand scale. But as far as I can tell, it was never the cost side of the equation that was miscalculated.