Part 2: Central Bank Policy Influences Demand for Household Credit
Continuing from Part 1... Much like Salmo Trutta, Kertch commented: Demand has fallen relative to supply, but it has increased in absolute terms. The grow in the global economy over the last four decades has required tremendous amounts of capital. It's Central Bank policy that has caused the "oversupply".
Mainstream economists think that by expanding capital, sustainable growth will follow. Sorry, reality doesn't work that way. If there is no shortage of credit then increasing capital formation is not the answer. It all depends on how that capital is invested. Highly leveraged money in financial markets might prove the most profitable investment at any given, but it probably won't create real economic growth.
DDLA commented: Potential Gross Domestic Product, either real or nominal, over the last 60 years it has been declining. Likewise interest rates have been falling for 30 years. Demand for credit in the United States, and indeed in Japan, Canada, the United Kingdom, and the European Union, has been falling for decades. The rate of growth of borrowing by businesses and individuals has been declining since the 1980's. Rates of capital formation have declined with most capital being invested overseas in low wage nations. So there is less growth in demand for credit and a vast growth in the supply of credit. The decline in interest rates over the last 30 years shows the great excess of the supply of credit over demand for credit.
The Nattering One mused: So am I to take it that we have domestically declining: capital formation, available credit, credit demand and price (interest rates). WTF? Double checking, those are all statements made by someone in other comments preceding this one. Please do go read them.
Another comment from above: "This is not happening (lower interest rates) because of monetary policy" You kid the President, yes? no? Alrighty then...
First, just make the following announcement on a Walmart PA (especially in Florida): For the next 5 minutes, we are handing out FREE methamphetamine, Oxycontin and crack for all addicts to enjoy on aisle 5. See what bedlam ensues, much like the housing bubble and its fallout.
Second, you don't amass $14 trillion in household and mortgage debt in parabolic fashion with ANYTHING in the equation declining, excepting one little thing, the cost of the crack, er, credit due to the CENTRAL BANK policy lowering the price of it...
Free drugs on aisle 5 everybody! and forget the next 5 minutes, how about for the unforeseeable future? There gonna be camped out, oh, and they are at the Fed window.
When you drop fed funds to ZERO, and effect negative interest rates, rates on FIXED 15 and 30 year mortgages go to under 3%, while ARMS are under 1%, your capital formation and demand for that crack, er, credit takes an exponentially parabolic path through the roof, and much like those Walmart crackheads, it did.
And NOBODY got crowded out from hittin that pipe or mainlining either, Federal, State, County and City borrowing have all kept an exponential pace with household and corporate.
As for central bank policy influencing capital formation, credit availability and the demand thereof, through setting the price at zero bound and holding it there for an extended period of time, you either get it or you don't, just like those Walmart crackheads.
More to come in Part 3.
Mainstream economists think that by expanding capital, sustainable growth will follow. Sorry, reality doesn't work that way. If there is no shortage of credit then increasing capital formation is not the answer. It all depends on how that capital is invested. Highly leveraged money in financial markets might prove the most profitable investment at any given, but it probably won't create real economic growth.
DDLA commented: Potential Gross Domestic Product, either real or nominal, over the last 60 years it has been declining. Likewise interest rates have been falling for 30 years. Demand for credit in the United States, and indeed in Japan, Canada, the United Kingdom, and the European Union, has been falling for decades. The rate of growth of borrowing by businesses and individuals has been declining since the 1980's. Rates of capital formation have declined with most capital being invested overseas in low wage nations. So there is less growth in demand for credit and a vast growth in the supply of credit. The decline in interest rates over the last 30 years shows the great excess of the supply of credit over demand for credit.
The Nattering One mused: So am I to take it that we have domestically declining: capital formation, available credit, credit demand and price (interest rates). WTF? Double checking, those are all statements made by someone in other comments preceding this one. Please do go read them.
Another comment from above: "This is not happening (lower interest rates) because of monetary policy" You kid the President, yes? no? Alrighty then...
First, just make the following announcement on a Walmart PA (especially in Florida): For the next 5 minutes, we are handing out FREE methamphetamine, Oxycontin and crack for all addicts to enjoy on aisle 5. See what bedlam ensues, much like the housing bubble and its fallout.
Second, you don't amass $14 trillion in household and mortgage debt in parabolic fashion with ANYTHING in the equation declining, excepting one little thing, the cost of the crack, er, credit due to the CENTRAL BANK policy lowering the price of it...
Free drugs on aisle 5 everybody! and forget the next 5 minutes, how about for the unforeseeable future? There gonna be camped out, oh, and they are at the Fed window.
When you drop fed funds to ZERO, and effect negative interest rates, rates on FIXED 15 and 30 year mortgages go to under 3%, while ARMS are under 1%, your capital formation and demand for that crack, er, credit takes an exponentially parabolic path through the roof, and much like those Walmart crackheads, it did.
And NOBODY got crowded out from hittin that pipe or mainlining either, Federal, State, County and City borrowing have all kept an exponential pace with household and corporate.
As for central bank policy influencing capital formation, credit availability and the demand thereof, through setting the price at zero bound and holding it there for an extended period of time, you either get it or you don't, just like those Walmart crackheads.
More to come in Part 3.
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