Debt, the financial sector and economic growth

Someone who occasionally reads and comments on my older blog has a formulation of real growth: increase in GDP less increase in debt. I've finally taken the bait and invested time to look at this, for the UK, and it's intriguing.

First, I've taken figures for M4 bank lending, from the Bank of England's website. This gives the quarterly increase as a percentage, re-expressed as an annual equivalent figure. I've used Excel to average the four quarters for each calendar year. Since the information is only available from partway through 1963, I use the estimated annual percentage increase from 1964 onwards.

For GDP, I use the Measuring Worth site and the "UK nominal GDP" figures (i.e. x million pounds, not adjusted for inflation), and again give the percentage increase year-on-year (the last available year here is 2008).

Here's the resulting graph for increases in M4 and GDP (click on graph to enlarge):

What is obvious is that apart from a short time in the early 1990s, lending has risen far more than GDP for the last 30 years. That extra money went somewhere, and it seems that all it did was inflate asset prices, in the stockmarket and in housing, at the same time that global trade has kept down wages and consumer prices.
Between 1964 and 1981, GDP increased by an average 12.69% and M4 by 15.16% - a difference of 2.48% per year. But from 1982 to 2008, GDP increased annually on average by 6.63% and M4 by 12.32% - a difference of 5.69% p.a. Compounded up over the past quarter century, that extra difference may explain how financiers have become so large and powerful. In the USA, according to Robert Creamer , the financial sector accounted for 8% of national GDP over the last 10 years, but made 41% of the profits.
I can't say when it will end, but equally I can't see this going on forever. This is why I am inclined to listen to the Jeremiahs who warn us of further economic setbacks, despite strong recent rises in the stockmarkets.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Interactive long-term house price graphs

Via Australian economist Steve Keen, here is a tool from The Economist magazine to help you see how house prices have changed over time. This may help you guess whether current prices are too high, too low or Goldilocks!

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Preparing for the worst is not for loners

Charles Hugh Smith offers some sensible general principles for making it through what he sees as likely very difficult, disrupted times ahead. Key recommendations include broadening your skills, and developing social networks. I think he's right - Robinson Crusoe is not the model for how to survive in our populous countries.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

More warning signs

Update: see "Jesse" on speculation about recent curious purchases of US Treasury bonds.

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"Mish" looks at two countries experiencing trouble - Argentina and Venezuela - and point out that European banks are exposed to risk in that area.

"George Washington" thinks the recent rise in the stockmarket has been because of activity by "hedgies, pension funds, banks and other institutional investors", including possibly even clandestine intervention by the government itself (I've seen this allegation before). However, in the US 80% of stocks are owned by individuals, not these corporate entities, so the suspicion is that the rally has been engineered to encourage the private investor to return to the market.

It doesn't seem to be working - much of the money withdrawn from stocks has gone into bonds (I think the unfortunate private investor may lose again if - as I fear - interest rates rise and bond values plummet).

I also suspect that if the individual re-entered the market because of what appears to be leveraged (boosted with borrowed money) speculation by the institutions, the latter would then cash-in and leave the individual holding the baby. This pattern is known as a "sucker rally".

But if the private investor is not "suckered" back into the market, then institutions will race to get out again (suckering each other, faute de mieux) and we could see a sharp fall in stocks. This, I assume would confirm the private investor's worst suspicions and lead him/her to pull even more out of the market.

Some, including myself, have suggested that the real bottom (at some point, goodness knows when) in the stockmarket may be somewhere around 4,000 on the Dow and 2,000 on the FTSE (adjusted for inflation, if that takes off). It may never happen, but Google "Dow 4000" and see some quite respectable commentators bandying around that idea.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Measure your pessimism

Hat-tip to Credit Writedowns. I'm relieved to see that I'm still at the Teddy/Cub stage!

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Human Nature?

Today, I started my 27th year of teaching at a State-supported US university. Compared with 1984, we have the same number of students, fewer full-time teaching faculty, and twice as many administrators. In the past 8 years alone, the non-academic budget has grown from 44% to 60% of the budget.

This week, we start discussions on increasing teaching loads (which will, of course, require more administrators to 'organize' things).

I see this trend in business, government, medicine and the military. Is it just the human condition that the non-productive take over everything?

I recall that, when the Mongols took over a city, they killed the bureaucrats, and took the scholars home with them. The Allies did much the same in Germany in 1945.

Perhaps they had the right idea?

Climate change and industrial activity

Could the current cold weather be partly related to a downturn in fossil-fuel-powered manufacturing and transportation? I only ask because I seem to recall reading/hearing that big freezes also happened in the 70s, and after both World wars.