Saturday, September 27, 2008

Bank lending - can somebody please help?

In the edited-out part of my recent letter to the Spectator, I pointed out that since 1963, average RPI has been c. 6.5% and the long-term real growth of GDP is said to be 2.5% p.a., so let's say nominal GDP growth has increased by 9% - my maths is up to that.

But over the same period, Bank of England stats show an annualised average increase in M4 bank lending of c. 13.5%, which suggests that lending grows at 4.5% p.a. above GDP. If that's right, UK bank lending as a proportion of GDP doubles every 16 years.

Can that be right? And what about the ratio of credit to the total of all national assets? Is that increasing, too? Because it looks as though eventually, the banks must own everything.

I reproduce below a graph from a mid-August post on Marc Fleury's blog. This shows the long-term ratio of total credit to GDP in the United States, and the current level of indebtedness seems to be way, way above the Great Crash situation in 1929.

Somebody please put me right and/or direct me to authorities and information sources.

My mind keeps saying, "This cannot be right, surely everything is sort of normal, really, we'll muddle through." I find myself discounting even McCain's Churchill quotation ("This isn't the beginning of the end of this crisis. This is the end of the beginning") and the politicians' use of the word "meltdown" to bounce Congress into accepting the bailout package proposals. I have spent years warning about a possible crash, but I've never, I think, allowed myself to get apocalyptic. I prefer my disaster movies to stay safely in the cinema.

So, how bad is it really, and does the banking system really have a tendency to acquire everything?


Anonymous said...

So, how bad is it really

Well, it's certainly not bad for everybody.

sobers said...

These sort of graphs scare the hell out of me. My limited common sense says that what goes up must come down eventually. And there are only two ways for that to happen - either the economy manages a growth spurt with no extra debt (unlikely I'd say) or debt availability contracts rapidly (possibly happening now). Perhaps we are at the tipping point. Perhaps we are a year or so from entering a new Depression. Scary stuff.


I'm trying to draw an imaginary "normal" line on that graph - maybe down to 175% of GDP AFTER an overshoot from the peak? It looks to me like musical chairs, this time with half the chairs removed at a go.

Dilemma time: either a very severe deflation where the cash holder is king (provided he got his cash out of the bank in time), or a desperate hyperinflation.

Or the start of one, followed by some of the other plus an attempt to prevent the currency being destroyed completely - skidding down the mountain with melting brakes. The last seems most plausible to me - it has the colour of the proposed bailout arrangement.

But what do I know?


Patrick - there were winners in the Great Depression too - rmemeber the old cartoons where the ragged-assed poor watch the cigared rich whizz by in big saloon cars to the opera?

Anonymous said...

Perhaps your comment should be "Given that banks can create efectively limitless supplies of debt IOU and pass them off as real wealth, what is there to stop the banks aquiring everything?". Ask the question this way and you will see that in principle the banks should be able to aquire all assets over time.

In practice the banks are not interested in aquiring everything. Their target is to make a profit. So they want people to take out debt and then pay it back with interest. After all, if we simply end up handing over our homes then there is no market for domestic property and these assets become worthless - which is not good news for the banks. 10% interest is ideal for the banks- a good return on capital employed. However, when governments push interest rates really low then the banks go for volume - if you force interest rates from 10% down to 5% then the banks must at least double the amount of debt they release into the economy to achieve the same profitability. Probably more like three times, to take account of their fixed overheads. Thus three times more debt is squeezed into the economy, mostly onto people and organisations that will struggle to pay it back
at 5% rates and will fail to pay it back completely at 10% rates.

The US has had gradually declining interest rates for 30 years, eventually reaching just 1% in 2001. This forced the banks to squeeze more cheap debt into the system, making everyone feel a bit richer as they own expensive property and cars bought on HP. However, now the banks cannot live with 1% rates and people that took out loans during the 1% era cannot repay, so the debt binge is forced to come to an end.

Fact is the US has had a standard of living much higher than Europe for the last 30 years based on taking on more and more debt. The economies should have converged. The debt has been used to buy a higher standard of living than the US citizen deserves for doing the same job. What the US will now do is print money to pay off the debt and the losers will be the foreign debt holders who will see their outstanding credits inflated into worthlessness.

Sackerson said...

I fear your prediction may be correct, Anon. But if it's become all about what the banks need, we need to reduce their field of operations. Anyone can have a high standard of living by spending money they don't have; by lifting us so high, the banks are threatening to half-kill us with the fall.