Both the crisis and the apparent boom before it were caused by the change in private debt. Rising aggregate private debt adds to demand, and falling debt subtracts from it. This point is vehemently denied on conventional theoretical grounds by economists like Paul Krugman, but it is obvious in the empirical data. The crisis itself began in 2008, precisely when the growth of private debt plunged from its peak of almost 30% of GDP p.a. down to its depth of minus 20% in 2010. The recovery, such as it was, began when the rate of decline of debt slowed. Across recession, boom and bust between 1990 and 2012, the correlation between the annual change in private debt and the unemployment rate was -0.92.
The last Depression saw debt levels fall from 240% to 45% of GDP over a 13 year period, and the ensuing period of low debt led to the longest boom in America’s history. We commenced deleveraging from 303% of GDP. After 3 years it is still 10% higher than the peak reached during the Great Depression. On current trends it will take till 2027 to bring the level back to that which applied in the early 1970s, when America had already exited what Minsky described as the “robust financial society” that underpinned the Golden Age that ended in 1966.
I find this particularly pertinent given that yesterday I was sent an unrequested offer for a loan of 7,500 euros, to be paid back in installments starting at 50 euros per month. It wasn’t the first time I’ve been sent this particularly offer, and not the first time I’ve been offered unrequested loans in general: the first time was when I was 24, didn’t even have a permanent job yet, and the loan was for 20,000 euros.
Those sums are too small to finance something of hopefully lasting value, like an apartment for instance, and they’re not meant for that: instead the suggestions include things like a nice holiday…
Going into debt to pay for a nice holiday! These kinds of offers have been lobbed at consumers all over the so-called developed world, flanked by articles praising a “shareholder society” and bemoaning Germans’ “conservative” tendency to save instead of playing the stock market, and debt-inviting mechanisms like the possibility to overdraft one’s checking account – I still had to request this explicitly on my first account, while nowadays it’s the norm. Add to this the omnipresent exhortation to (conspicuously) consume and unless one has been given a parental education that stressed not to spend more than one has, and to control one’s desires (and reflect on whether one really needs or only wants something), it was (and is) hard to resist this drive towards private debt.