A detailed examination of the role of indebtedness on growth involves distinguishing two debts:
1) the debts weighing directly on the growth, because it is the households, the companies or the public administrations which contract them, we will speak about them of nonfinancial debt;
2) debts of the financial sector made up of the debts of the financial companies, the issues of units of the mutual funds and the shares. We could challenge the amalgam of mutual funds and shares under the term debt. The important thing is for us to bring them together so that we can better differentiate them. Let’s examine our two curves.
It is very important to note that the ratio of non-financial debt to GDP reflects the following fact: between 1987 and 2000, GDP was not stimulated more and more by non-financial debt, GDP / non-financial debt ratio. stay flat during this period.consol
On the other hand, the ratio of non-financial debt to GDP plays a leading role in the rapid increase of non-financial debt in growth since 2001, the curve of the ratio of non-financial debt to GDP is sharply above.
The economic system has overhauled well since 2000 at the risk of a slowdown in growth in the US. The lower correlation between declining productive investment rate, saturation of service markets replacing industry (etc.) is verified.
Non-financial indebtedness by artificially pulling growth from above allowed all of these phenomena to be obscured. The crisis has made them resurge in the form of real mass unemployment, a sharp slowdown in growth and massive indebtedness driven by public credit.
We also note a very interesting correlation between the phases of financial debt reduction and the periods of recession after 2000. American capitalism and its crises, therefore, changed very much after this date.
Before studying this phenomenon of correlation between crises and the vagaries of financial indebtedness, one thing has to be noticed. Since 2009, non-financial debt does not seem to stimulate as strongly as before growth. The ratio of non-financial debt to GDP has been flat since 2009, with poor growth no longer benefiting from a growing debt-non-financial / GDP ratio.
This could bring water to the mills of Keynesians who could argue that the indebtedness of non-financial economic actors is not strong enough to revive activity.
The contribution of different indebtedness to the growth of GDP upsets this thesis: The state had to come to the rescue of household debt to support the activity.
The increase in its contribution to growth is considerable, as it doubled its total financial debt and market debt in record time (2008-2013). These margins are now restricted. The contribution of indebtedness of non-financial companies should not be misleading. This long-term increase is accompanied by declining productive investment rates.
Non-financial firms do not borrow money to accumulate productive capital; in this case, this debt would be a positive contribution to growth; nonfinancial corporations accumulate financial capital to withstand the pressure of interest paid and dividends served, a very large accumulation of financial capital, they manage to reduce the pressure of the financial system on them by improving the balance of their income (Interest and dividends received – Interest and dividends paid).
One can imagine increasing the federal contribution to support economic activity, but in this case, the expenditures should have been higher in the past and/or in the future. The federal state does not have the means: contrary to a commonly held idea, the United States cannot borrow as far as the eye can see. Since 2011, the Fed’s support for the consolidation of debt and the maintenance of interest at a reduced level perfectly illustrates the existence of a limit on federal indebtedness.
Federal debt has been slowing since 2011.
The distinction between the types of debts makes it possible to show what determines the crises and the contractions of the activity. At least until 2008, the phenomenon of rising financial sector debt to financial firms has the same function as the debt of non-financial companies. This debt and its evolutions are not correlated with the crisis phases.
The true correlation between indebtedness and crisis phases emerges when considering issues of mutual funds and shares. It is the developments in the net issuance of these two forms of debt that are correlated with the crisis. When we talk about debt, we mean the term in a broad sense: a stock is compared to an obligation a permanent debt whose return varies with the volume of dividends reported in securities. Mutual funds are funds invested in securities.
The question then is who holds these debts. In the United States, the holding of stocks and investment funds is massively concentrated in the hands of Top Ten household funds. The correlation we see is a correlation between the drop in issues and the value of financial assets and the contraction of share issues and mutual fund shares.
Seizures, therefore, have as their obvious motive the value of movable heritage. This value is at the heart of the millennial crisis that has not seen a fall in housing values at this time due to the active role of Fannie Mae and Freddie Mac’s GSEs in supporting property prices. This role was no longer playable in 2008 – they were bankrupt – it is the income and real estate that led to a drop in consumption and a general slowdown in the economy.
This fall was offset by social spending which boosted household consumption by 2 percentage points of GDP. What then explains, in a regime of overgrowth, the correlation between the fall in the value of financial wealth and the contraction of economic activity? It is the contraction of the consumption of the rich that causes the economic slowdown, and this slowdown then weighs on the consumption of all the other households which undergo and accentuate recessions.
It is the rich, whose incomes have steadily declined, who, by the fall of their consumption, is the determining factor in the gravity of the crises; the whole economy follows.