The growing influence of debt on growth – the general disruption of growth

An examination of the relationship between real GDP growth and the Borrowing / GDP Ratio is instructive.

Between 1980 and 1992 (A on the graph), changes in GDP are not correlated with debt. Debt can drive growth, it is not yet the driving force, the productive economy still has sufficient potential to ensure an autonomous wealth creation from debt and credit penetration to the heart of the dynamic of the economy.

To convince oneself of this, it is enough to examine this graph more closely. Between 1980 and 1992, the debt-to-GDP ratio is still too low, the national indebtedness of the USA progresses only too weakly, it passes during this period of 1,8-1,9 to 2,7. The US economy remains largely an economy of production, it is not yet a financialized economy or a general indebtedness is at the heart of the whole system of production of wealth. Everything changes during the period 1992-1999 (B on the graph), GDP growth is in line with the Ratio Empunt-GDP.

The debt-to-GDP ratio rises sharply in a relatively short time. This ratio picks up from 1995. This period can be divided into two distinct phases: before 1995, the ratio is still in a logic of moderate increase: 2.7 in 92, 2.8 in 1994. The climbing starts in 1995 with a ratio of 3.1 which is brought in 1999 to 4.2. Growth is linked to debt, it is even less hit after 1995 as debt induces it still more strongly.

This second period coincides with the tipping of the US economy into a financial economy that is becoming the heart of economic growth. This growing grip of debt and finance on growth is inseparable from the mode of capital accumulation in the US. Until the mid-1990s, growth, and investment succeeded in mobilizing an ever-increasing share of Americans, while the substitution of services for industry tends to make this product less and less wealth-generating per capita.

The stagnation of the activity rate of the American population from the second half of the years should have resulted in a slowdown in growth. This growth should have slowed all the more strongly as the rate of national accumulation of productive capital is under the pressure of the Top Ten, which is enriched by falling investment and organizing an increasingly unequal share of income. This slowdown does not occur because US indebtedness puts the US economy in over-evaluation.

The increase in GDP is then adjusted to debt. Hence a rapid increase in GDP between 1995 and 1999, with a growing GDP / debt ratio. Hence also a widening of external deficits refinanced by net capital flows, a growing deficit largely explained by overconsumption financed by a mixture of capital gains, consumer credit, artificial swelling. the value of heritage …

This predominance of finance overgrowth appears total after 2000. Whenever the GDP / debt ratio falls, there is a sharp decline in growth, this is the case in 2000-2002 (C-1) and 2008 (C3 ). Conversely, each time the ratio of GDP to debt rises, GDP growth is stimulated. This is the case between 2010 and 2013 (C-4 on the chart), especially from 2010, the crisis still bearing the effects of the growth of indebtedness in 2009.

The period 2003-2007 seems to be a resistance to our argument.

Our thesis works between 2003 and 2004. But between 2005 and 2007, there is an upward trend in the ratio of debt to GDP and a drop in growth. This may be the sign of a deeper change and a new phase of the driving role of national debt consolidation on economic growth.

The period 2000-2013 is characterized by a worrying evolution of the relationship between growth and debt. The debt-to-GDP ratio is still significantly on the upside, but GDP growth has been trending down since 2000. This is a sign that indebtedness is no longer significantly effective on GDP growth as before.

This loss of efficiency is visible in C-2 as much as in C-4. Growth in national debt is no longer working because the financial phase of US growth (1992-200) has exhausted its effects. Debt and the real economy are going backward, the growth in debt since 2000 shows the limits of an economy artificially supported by debt in periods of under-accumulation of capital. The general indebtedness of the country is the necessary counterpart of an economy whose too low national productive investments can no longer support the level of artificially stimulated growth.

We have consistently argued that the American recovery was lagging behind public credit.

But this difficulty of the public credit to ensure the recovery must be placed in a broader framework: the growing difficulty of the American economy has to grow strongly under the effect of a growing indebtedness whereas the productive effort of the country is insufficient.

We can thus note increasing disturbances in C2 which are repeated more weakly in C-4. It is at this point that we do not believe in the effectiveness of Keynesian policies as a solution to the crisis. Debt has resumed in C-4, but growth remains uncertain and is collapsing as the national debt is again rising. Growth in indebtedness in any form could have only a limited effect on growth.

The crisis is not a crisis following the lack of demand: a solvent demand of households should be lower to stabilize growth, a stronger household demand due to public transfer – financed on credit – would have the effect not to respond to the causes of the crisis, it would be a temporary remedy of little effectiveness. It is all the relations between production, distribution of wealth and investment that are to be reviewed.