Another longer excerpt from The New
Depression (taken from my Kindle highlights, so the excerpts aren’t
necessarily the paragraphs I have put them in below, and there may be things in
between that I didn’t highlight). I've been posting a lot of excerpts as I think this book gives the clearest description of the way credit has changed our economy over the past few decades. As Duncan states in the book, we've switched from Capitalism to Creditism, and the economic rules and theories of this system have yet to be figured out, but they are different. Keynes, Mises, Rothbard, Fisher, Minsky, and other great economists developed their theories in a much different financial and economic world, and I think it is important to realize this when developing the right framework today. Many of their thoughts are timeless, and many have been misinterpreted.
“By the time the credit crisis
began in 2007, the debt issued (and the credit extended) by the GSEs and the
asset-backed security (ABS) issuers had radically altered the size and
structure of the U.S. economy. Combined, the GSEs and ABS issuers had $12
trillion in debt outstanding, up from $1 trillion 20 years earlier.
What did Fannie and Freddie and the ABS issuers do with all the money they
borrowed? They lent it to the household sector in the form of mortgages and
consumer credit. Between 1982 and 2007, the mortgage debt of the household
sector rose ten times to $10.5 trillion. Consumer credit increased six times
over the same period to $2.5 trillion.
Relative to the overall size of the economy, the financial sector’s debt rose
from 21 percent of GDP in 1980 to 116 percent in 2007. The household sectors’
debt rose from 50 percent to 98 percent of GDP over the same period.
Adding all sectors together, total credit market debt averaged around 150
percent of GDP between 1946 and 1970. That ratio moved up gradually to 170
percent by the end of the 1970s, but then accelerated sharply during the 1980s,
ending that decade at 230 percent. The rate of debt expansion slowed during
most of the 1990s, but surged again from 1998. By 2007, total credit market
debt to GDP had hit 360 percent.
That ratio understates the impact that so much credit growth had on the
economy. That is because credit, as it expanded, caused the economy to expand,
too. The numerator in the equation influenced the denominator. Put differently,
the credit growth caused the economic growth—or, at least, much of the economic
growth.”
–Richard Duncan, The New
Depression