Saturday, June 3, 2017

Efficient credit expansion

The charts below have a blue line and a red line.  The red line is the same.  It is Nominal Gross Domestic Product (NGDP).

In each of the charts separately the Blue line represents 1) Business and Household credit expansion as a percent of NGDP, 2) Bank credit expansion as a percent of NGDP, and 3) Federal Government credit expansion as a percent of NGDP.

I characterize 1) Business and Household credit expansion as efficient, and 2) Bank credit expansion as really bad, and 3) Federal government credit expansion as stupid.

Charts 1 & 2: The Blue line going up means that credit expansion is going up faster than NGDP.  Going sideways means the specified credit expansion is going up at the same pace as NGDP.  When the Blue line goes down it means the specified credit expansion is contracting relative to NGDP.

Consider Chart 1, what I call efficient credit expansion.  That is because it is highly correlated to NGDP.  When Business and Household debt expanded at a pace faster than NGDP, NGDP, the Red line, goes down.  When Blue is sideways so is Red.  Note what happened after the Great Recession.  The Blue line went down and NGDP, the Red line, recovered and stabilized along with the Blue line stabilizing.  This is important when we get to the last chart.

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Consider Chart 2, Bank Credit expansion.  This is evil debt.  The banks became all important to the Federal Reserve Bank and economists after the double dip recession and the start of the “Great Moderation” (not).

The Secular trend of financial debt expanding faster than NGDP is correlated and I believe caused the resultant secular decline in NGDP.  Only once the banks got shanked in the Great Financial Crisis and Great Recession, did NGDP stabilized.  See the right side of the chart.

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Now for Chart 3.  Federal Debt expansion.  Keynesian economics says government spending is to increase when private sector aggregate demand is weak.  I don’t really see any correlation here.  So I call it stupid.  Since the Great Recession is seems like a waste; all that massive debt expansion.

Referring back to earlier, I believe the “efficient” expansion of Business and Household credit is what caused the recovery and stabilization of NGDP after the crises.  Not Federal Deficit spending.

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Conclusion.  The role of banks and the federal government must be reduced if there is to be a prosperous economy.

In anticipation of a criticism I prepared another chart.  One could say that using the NGDP Red line could distort the picture I am presenting because the Great Moderation was all about reduced and steady inflation. That isn't all of it but yes.  So here is Business and Household credit expansion divided by NGDP just like before but the Red line is now Real GDP.  And I went one further.  I eliminated the recession bars. The correlation holds, reverse or otherwise. Nicely.

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This explains a lot - checking vs savings

The growing distance between savings and checking deposits.

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