Spotted by Lola at Open Democracy:
For a while, this bargain felt win-win for both sides: as the Bank of England recently acknowledged, bank lending creates money at the same time as it creates debt (McLeay, Radia et al. 2014). This money is then spent, either to buy assets, or goods and services. It therefore adds to total demand, and to incomes and capital gains. So, as banks created “money from nothing”, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound...
But you can’t have very high levels of credit-based demand without the corollary of an ever-increasing level of debt relative to income. More and more of income is required to service this debt, cutting into spending on goods and services. The turnover of existing money slows down, reducing aggregate demand from actual work, while increasing the dependence on credit.
Aren't those two things opposites? Either credit/debt increases GDP or it reduces it.
As a matter of fact, in the real world it does neither to any great degree.
1. Most of the (increase in) debt is mortgages, which is just an alternative to paying rent. The inevitable transfer of spending power from tenant/borrower to landlord/depositor is pretty much unchanged.
2. A small part of (the increase in) overall household debts (maybe one-eighth?) is credit cards and personal loans used for buying other stuff. This merely brings forward spending a few months or years. Somebody who wants a new car can save up for a few years or he can buy one on HP, take out finance lease, personal contract payment etc (these are all pretty much the same in economic terms). But that person will probably never own more then one car at any one time. Most of that net-extra spending is in the past - the bloke who bought a car on HP two or three years ago is spending less of his current income on other stuff because he is still paying off the HP instalments.
3. It all averages out anyway, yes, increasing levels of debt seem to go hand in hand with extra GDP, until the credit bubble pops, and then we lose GDP. Chances are, the overall long term trend would be much the same if mortgages and house prices were capped somehow (although that would be a good thing in and of itself).
Clearly, Keen's overall point that the whole economy has been hijacked by the banks is correct, he's just very vague on the details.
Debate Magazine
