Sunday, July 12, 2015

"Credit is what we are looking at"

From the same BRICS bank to lend in local currency by April article that I didn't link yesterday:
[New Development Bank (NDB) President KV Kamath] said the NDB, with a capital of $100 billion, will look at various instruments of credit to the member countries -- Brazil, Russia, India, China and South Africa - which require huge resources for development.

"Basically, credit is what we are looking at. Various instruments of credit that we are looking at," said Kamath ...

Credit is also what I look at on this blog -- but you knew that!

I don't like to make predictions because I'm always wrong. But I can't see any outcome other than success for the BRICS bank. Yeah they want to expand credit, and yeah excessive reliance on credit is a problem. But here's the thing: We are the ones with excessive credit, not BRICS. That's why we can't get good growth. The BRICS and them, they don't have excessive debt. Not yet. That's what President Kamath and NDB see as the problem they can fix. They want to fix that problem, because what's excessive debt to a debtor is an abundance of assets to a creditor, and a source of income for banks.


We get growth by expanding the use of credit. That's not the only way to get growth, but it's the only method we use. (I think we want a good alternative, like greater reliance on government-issue coupled with reduced incentives to rely on bank-issue. But that's not the topic today.)

We get growth by expanding the use of credit. But credit has costs -- costs that expand along with the reliance on credit. When the reliance on credit is relatively low (as in the U.S. after World War Two, or in the BRICS today) credit costs are also low. So it doesn't take much "extra" credit to offset those costs. But when the reliance on credit is relatively high (as in the U.S. since the 1970s) credit costs are also high. So then it takes a lot of credit use, just to offset accumulated credit costs. This means that the next new use of credit will have to be large before it begins to have a positive effect on growth.

The bigger the existing accumulation of debt, the larger must be any new credit use before it provides a boost to the economy. This is the reason we get downtrends in the marginal productivity of debt.

In the United States, the existing accumulation of public and private debt was so large, at the time of the crisis, that the massive, emergency-level deficits of 2009-2012 produced hardly any boost to growth. Sure, those deficits prevented a big decline. But they didn't give us growth.

And either way you look at it -- decline prevention, or the failure to grow -- what you see confirms the analysis that an excessive accumulation of debt hinders growth.

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