Capital is enough

The global economy is not simply suffering from a European debt crisis. Debt itself is in trouble. This morning on Radio National there was an interview with David Graeber, Reader in Social Anthropology at Goldsmith University London and author of “Debt — the first 5,000 years.” Graeber, who is involved in the Occupy Wall Street movement. He made the point that debt is a promise and then asked the question: “Why are some promises considered more important than others?” Why is a promise to repay to a bank considered inviolate, while the politicians’ promise to say, eliminate university fees (in the case of the UK) considered something easily broken because “circumstances have changed”.

It is a good question. Why does moral hazard apply to governments, as we are now seeing with Greece, but not to banks? You know, the ones that loaned to Greece. And farmed out the CDOs and the CDSs and on, ad infinitum in lighting the fire that led to the global financial crisis. The Greek debt crisis is still likely to be solved in the usual way: let the country default and then recapitalise the banks that had exposures. But that, again, leaves banks with no moral hazard (and remember, the GFC started when Lehmann Brothers was allowed to go down because regulators were keen to avert moral hazard — lesson, banks are not subject to moral hazard).

Graeber made the point, confirmed by others, that there have been periods in human history when money was driven by intangible agreements, credit. And there have been other periods when it was more a tangible thing to be exchanged, various iterations of what we now call cash. He also made the point that there is usually an institution that oversees the credit creation system to stop it getting out of hand. That is exactly what is lacking in the current global capital markets. There is nothing to oversee the hyper growth of derivatives or high frequency trading or endless debt games, because there is no global institution that equates with the global markets. It is a clash of the market state and the nation state (or regional quasi-state like the EU). The market state is winning, which is probably why we are all on the brink of losing everything.

The problem with the credit version of money is that its growth mens that eventually the sums do not add up. Compound interest always outpaces real economic activity; the two will eventually decouple. And when that happens, someone has to clear up the mess. Herman Maley, formerly an economist with the World Bank, makes this point:

““Capital,” says Frederick Soddy,”merely means unearned income divided by the rate of interest and multiplied by 100” (Cartesian Economics, p. 27). He further explains that, “Although it may comfort the lender to think that his wealth still exists somewhere in the form of “capital,” it has been or is being used up by the borrower either in consumption or investment, and no more than food or fuel can it be used again later. Rather it has become debt, an indent on future revenues…”

In other words capital in the financial sense is the future expected net revenue from a project divided by the rate of interest and multiplied by 100. Rather than magic stuff it is an indent, a lien, on the future real production of the economy — in a word it is a debt to be repaid, or alternatively, and perhaps preferably, to not be repaid but kept as the source of interest payments far into the future.

Of course debt is incurred in exchange for real resources to be used now, which as Soddy says cannot be used again in the future. But if the financed project can extract more resources employing more labor in the future to increase the total revenue of society, then the debt can be paid off with interest, and with some of the extra revenue left over as profit. But this requires an increased throughput of matter and energy, and increased labor — in other words it requires physical growth of the economy. Such growth in yesterday’s empty-world economy was reasonable — in today’s full-world economy it is not. It is now generally recognized that there is too much debt worldwide, both public and private. The reason so much debt was incurred is that we have had absurdly unrealistic expectations about growth. We never expected that growth itself would begin to cost us more than it was worth, making us poorer, not richer. But it did. And the only solution our economists, bankers, and politicians have come up with is more of the same! Could we not at least take a short time-out to discuss the idea of a steady-state economy?”

I am not sure that one should aim for a steady state economy, but there is no doubt at all that the creation of entirely new forms of leverage in the use of derivatives, high frequency trading et al. is not only unsustainable — we are still reeling from the effects of just one type of derivative, CDOs — but it represents an entirely new form of credit growth, a sort of hyper, hall of mirrors credit growth. This is not just the unsustainable curve of compound interest. It is compound interest multiplied several times, using mathematical models and computers.

To repeat, the daily cross border transactions in the global capital markets are about $US3.2 trillion. That is simply laughable, a collective insanity that could only ever have had one outcome and we are now seeing a glimpse of what that is.

Money itself is on the line. Equity capital is already in deep trouble. Peter Strachan, who runs a newsletter in Western Australia, has recently called for an alternative stock market in Australia (to the ASX and ChiX) that bans high frequency trading and CFDs and all the leverage games. Companies are sick, he says, of having price earnings ratios below 10, and dividend yields that are above 10. It may not be long before the Occupy Wall Street movement is matched by an Exit Wall Street movement instigated by big American companies.

But the bigger issue is what will happen to debt? Credit is the lifeblood of any economy, and blind governments have allowed credit itself to be debauched, all in the name of the absurd ideology of “free markets”. And the absurd notion that capital (that is agreements) is scarce. Maley found this out:

When I was in graduate school in economics in the early 1960s we were taught that capital was the limiting factor in growth and development. Just inject capital into the economy and it would grow. As the economy grew, you could then re-invest the growth increment as new capital and make it grow exponentially. Eventually the economy would be rich. Originally, to get things started, capital came from savings, from confiscation, or from foreign aid or investment, but later out of the national growth increment itself. Capital embodied technology, the source of its power. Capital was magic stuff, but scarce. It all seemed convincing at the time.

Many years later when I worked for the World Bank it was evident that capital was no longer the limiting factor, if indeed it ever had been. Trillions of dollars of capital was circling the globe looking for projects in which to become invested so it could grow.

That figure is now hundreds of trillions. It is time to stop these debt games and stop pretending that the tail can wag the dog.

Comments

  1. “…..the daily cross border transactions in the global capital markets are about $US3.2 trillion….”
    Yes, but this is not “payment” for anything, it is “bets”.
    I think we don’t need to “ban” derivatives, we need to understand them better. They should actually be regulated like the insurance industry and the gaming industry – the people taking the bets/ issuing the “insurance” need to have the “reserves” to back those bets/ insurances. And the industry players involved should be levied to provide further backup funds.
    I keep trying to get people to understand that what went wrong on Wall Street in 2007 was NEVER “free markets failing”. If the insurance underwriting industry was flooded with investment from masses of people convinced that disasters had stopped happening, would it be a “failure of the free market” when a disaster DID happen and payouts wiped out everyone’s investments?
    This is what happened with derivatives for Mortgage Backed Securities – masses of investors thought “house prices can never fall”. Of course the RISK of house prices falling ended up seriously “under priced” with masses of people putting billions of dollars of investments on the line on that basis.

    • +10

      Couldn’t have said it better myself.

      Leverage has always been around. It is not the problem.

      The problem is misuse of leverage.

      Trying to eliminate leverage will be aboute as successful as trying to eliminate alcohol. Ask the USA how that worked out.

      There is indeed a failure of regulation, but that failure is another symptom of the deeper issue of global over-confidence on both sides of major transactions.

      • Spot on. Misuse of leverage due to overconfidence has been and is the problem.

        That overconfidence is starting to weaken, as reflected by share markets trending down again.

        If the politicians and central banks would get out of the way, I think the markets would soon cure the too much confidence issue, and would then cure the too much leverage issue.

        Let the banks fail. Yes it will be extremely messy. Yes it will be extremely painful. But will it be more painful or messy than any politically motivated “solution”? Doubtful.

  2. SON , I am actually reading  David Graeber’s book at the moment. I highly recommend it to everyone, even if only to realize just how little modern economics understands about it’s own historical record.

    I am not sure if he mentioned it in the interview but during many periods of history it was considered normal practice to have debt jubilee’s when it became obvious that debts had become too onerous and had started to effect the function of society.

    • DE, as you would know an increasing number of experts are raising the idea of a debt jubilee. It would seem the only way to escape this noose of global debt, the enormity of which retains the capacity to destroy the global financial system and force hardship and misery on millions.

      Big problem is money/debt/credit/capital whatever you want to call it is now in such exotic forms and labrynthine structures – largely a product of the derivatives explosion (estimates $600 trillion to one guadrillion) – that the unwinding of these would seem almost insurmountable. It will be the derivatives markets that wreak destruction. Is there a way out?

      (ps articles at TAE under the primers & must reads section are worth a look)
      http://theautomaticearth.blogspot.com/

    • So this Debt Jubilee, DE…how does that work? I mean for every liability there is some one, not always a devious bank, with an asset. Do we all get to write off our assets as well? And if so: where’s the moral hazard reduction that we all see as missing in busines today? Strike me as a road to mistrust by future lender; higher resultant prices;and rampant inflation as the cost of goods and services is escalated to cover the risk of default. But maybe I’m missing something?

      • I’d also like to know how a debt jubilee will work.

        would that not penalize savers who have rented while not taking on debt? as those who have taken on debt, get it forgiven (a free house?)

        would I be better off loading up with debt now if it’s going to be forgiven later?

        surely not.

        More informed thoughts on the practical implementation of a jubilee would be much appreciated

      • My comment was on one of historical record. In history, both state (secular and non-secular ) had periods where it was declared that the debt slate was wiped clean.

        Whether that would work today or not is a question of implementation. Although the financial institutes did a pretty good job of getting one for themselves back in GFC I.

      • I have exactly the same fear of savers being punished for frugal and sensible behaviour with a Debt Jubilee that only wipes out debt but fails to reward those who were prudent enough not to go into debt to buy overpriced real estate.

        Everyone should receive the same lump sum of money and those who have debts can use it towards reducing their debt. Those of us without debts should receive the same amount of cash with perhaps a time limit imposed to encourage us to
        spend our portion of the Debt Jubilee and thus stimulate the economy . At least then savers won’t feel like complete mugs.

      • What if investors lost their debt but also the asset? ie, the house, and the house was transferred to the renter?

        if renters are the ones indeed paying off the debt, then the asset should be theirs, not the person who took the now non-existent risk

      • Chas P

        That makes way too much sense to ever be a consideration.

        The meek shall NOT inherit the earth.

        The savers of this world are meek, mild and goners.

      • Savers would not be punished – if a bank’s asset is only worth say 60c in the dollar because that is all borrower can support with their income, then the bank’s liabilities, (our deposits) are not worth $1 for $1. How much would depend on where you were in the pecking order.

        Which then brings you to moral hazard. How are we to tell whether a bank is a good risk or not, when during 2008 the banks didn’t know which one of them were good or bad risks?

        A jubilee could occur as part of the nationalisation of a financial institution.

        Which then brings you to the questions as to whether retail banking is a private service or a public utility?

    • If there is a Debt Jubilee there’d better be something for those of us that were responsible with our money. If there isn’t then I seriously will consider the use of violence.

  3. Great post. Thanks.

    I can’t see there being any regulation or action taken until this whole situation works it way through in the way of currency collapse.

    Given that the debt system has become our ‘money’, there it is difficult to differentiate between what is capital and what is credit.

    There is no will-power to fix this. As the debt system collapses in of itself, hopefully a better system will replace it. This is why many are turning to gold as they do not want to participate in the status quo. It is an effective way to protest.

  4. ”Why are some promises considered more important than others?”

    The idea of “moral hazard” also needs to be re-examined. As the Lehman episode demonstrates, it is all very well to allow the reckless and profligate to fail. But this action has consequences for others too, as we have all seen, whether we were connected to Lehman or not and whether we had been reckless, profligate or just unlucky. So this idea is not a very useful or complete guide to action, since it does not capture all the dimensions of the dilemma it attempts to define.

    More broadly, when it comes to capital, we clearly need to comprehend that saving and borrowing are inversely related concepts. If saving is the postponement of spending, then borrowing is the act of bringing forward future spending to the current period.

    And if this time-shifted spending is dedicated to consumption (rather than to investment, which can be defined as spending that will expand future productive capacity) then it follows that future consumption MUST at some point be curtailed. We have passed that point and this is manifested in the “excess debts”/”impaired assets” that appear on the balance sheets of governments and households in all globalized economies. We are being required to pay now for our past consumption.

    From the standpoint of any individual (household or state), the solution to this is obvious: cut current consumption and use the surplus to pay off past consumption-spending. But of course, no individual stands alone, and when all individuals attempt to do this at the same time, the hoped-for surplus disappears. In fact, the reduction in consumption/demand is enough to drive up aggregate current-period borrowing even further in a completely self-defeating cycle.

    This would not necessarily be terminal if the means existed to add to demand and current income, say by investing in new productive capacity, but even this cannot be pursued for long in the absence of new consumption-driven demand (as the Chinese are about to discover).

    The result is that everyone is being forced to cut consumption/increase saving at the same time. This can only drive contraction – reductions in demand will erode output, employment and incomes, and as demand ebbs away investment will also fall. This recessionary process is propelled by the exhaustion of debt-powered consumption and is now taking hold in a serious way in all corners of the global economy.

    The matter of which promises will be protected and which will be dispensable is going to be the central issue of politics and law for many years to come.

    For mine, I think there is a sense in which the owners of investment capital have been too successful in firstly extracting consumption-dollars from households/governments (really, they are almost the same thing these days); and secondly in preventing the transfer of some if their surplus back to the household/public sector. The result is a cash-laden industrial sector, a bankrupted household/public sector, and a failing financial sector. This is not a sign of a healthy economic system. We need reform, serious, far-reaching reform aimed at creating stability and control.

    • Good: ” . .when it comes to capital, we clearly need to comprehend that saving and borrowing are inversely related concepts. If saving is the postponement of spending, then borrowing is the act of bringing forward future spending to the current period.

      And if this time-shifted spending is dedicated to consumption (rather than to investment, which can be defined as spending that will expand future productive capacity) . .”

      Just thinking: if borrowing was basically limited to productive assets and cash purchases linked to consumption, then what would happen?
      For example, consider the Great Oz Ponzi:
      Build a new home (productive in sense employment is generated in building phase) – you get to borrow;
      Buy an existing home (consumption of existing asset) – you are severely limited by enforced lending criteria.
      This would limit debt in the economy and encourage employment and productivity overall.
      Banks would not bear thinking about this idea, nor would govts that are basically addicted to Stamp Duty revenue (the higher the debt the better as far as they are concerned).

  5. Delusional, Imagine a debt jubilee now … $US600 trillion of derivatives wished away, for instance. The house of cards would come crashing down.

      • Seriously DE,

        This is truly delusional.

        “… but recent sovereign defaults are proof that it can and does happen.”

        In every case these were wealth transfers not “jubilees” (debt forgiveness).

        I suggest you read this paper about Argentina over at VoxEu.

        http://www.voxeu.org/index.php?q=node/7055

        Pesification and debt dilution: The positive balance-sheet effect

        If transfers to those with a greater propensity to save and invest (ie the corporate sector and the rich) are not unusual in post-crisis bailouts, Argentina´s devaluation-pesification combo turbo-charged the dilution machine, adding to its propelling power.

        The maths is simple. Take an Argentinean company that owed $10 million to the bank at the end of 2001; six months later, with domestic liabilities ‘pesified’ (ie, converted to the local currency at the pre-crisis one-to-one parity) and the exchange rate at four pesos to the dollar, the same corporate debtor saw its dollar debt reduced to $2.5 million (a 75% haircut).4 The resulting debt dilution, coupled with depressed wages and subsidised utility prices, provided the internal funds needed to fuel investment, which was not driven by external demand but rather by extraordinarily high corporate profits.

        (DE take note please of the next paragraph! There was jubilation alright.)

        Moreover, while Argentina’s corporations may have been short dollars at the time of the crisis, their owners were mostly long – the reflection of a large (and largely underreported) stock of foreign assets abroad.5 These dollarised savings provided the ammunition for bargain hunting in the aftermath of the devaluation and now help explain the swift rebound of real-estate prices and residential construction, one of the drivers of the Argentinean recovery.

        Thus, while a devaluation of a financially dollarised economy brings devastating balance-sheet effects on dollar debtors, the de jure pesification of financial obligations (perhaps the only way to avoid massive defaults on domestic contracts) inverts the balance – debtors benefit from debt dilution at the expense of creditors. In much the same way as inflation helps reduce real wages, pesification helps restructure debts avoiding bankruptcy costs.

      • Interesting Anon.. But I am not sure what your actual point was.

        A debt jubilee is always going to be a “win” for the indebted and a “loss” for the creditor.

        Again, I am not suggesting this should occur, I am simply pointing out that there have been many times in history that it has occurred.

        The current “haircuts” occurring on Greek debt are a very recent example.

    • $US600 trillion of derivatives is just the notional value.. if you just consider the margin required, I.e. real money (no offence meant, anti—fiat money guys) needed to open and maintain a derivative trade, then it is minuscule.
      .
      The so-called liquidity provided by derivatives is just a chimera.. there is no delivery of real money or goods or services involved. . Just a zero-sum, massively multiplayer online game of poker.

      • Yes, more or less – And I can stretch the analogy even a bit further.
        .
        HFT traders are the gamers who want a faster internet connection with lower pings or latency.
        .
        And the commodity/currency “expert” appearing on CNBC/Bloomberg TV is as much an expert on commodity/currency.. as is a Call of Duty – Modern Warfare level 12 gamer is an expert in hand-to-hand combat!!
        .
        The lunatics are running the Free market asylum. This is the equivalent of having bald gamer dude spouting on TV as a military “expert” when Bin Laden gets shot in the face by the special forces.

  6. The debt capital is just a vehicle used to skim the real capital i.e. the one that is derived from productive economic activity. Financial institutions use capital created out of thin air which we then have to pay back with interest. When the debt is paid back the credit part gets extinguished by the interest that we have to pay on it represents real money. It is therefore logical that if the financial institutions are freely allowed to create debt capital they will try to use as much of it as possible. Am I right?

    • Lax currency management lead,
      Lax regulation,lead,
      Lax productive-incites,lead,
      Lax spending and income,lead,
      Lax investments and the Mal-investments piled-up and Run away with spending

      Am I right….cause you are on one-side until you turn around and then it changes..
      Cheers Bud ….JR

    • You should be a teacher JPK, that is one sweet word picture (formula/graph) you have painted for this keen student.

      Ta !

  7. It’s the weekend – I shouldn’t have to think this much 🙂

    Brilliant article, yet again SON.

  8. StroppyTheWonderDog

    SON,
    Maley is hinting at an upper limit on debt based on the capacity for economic growth. A ‘steady state’.

    Isn’t that what “an institution that oversees the credit creation system to stop it getting out of hand” would do? Think about an upper limit on debt?

    Do we need to think about ‘sustainable’ debt and treat debt more like fish or wood?

    Work out an annual quota based on the productive capacity of the natural system (warning – government/scientist/economist [email protected]!!!) and auction that off to whoever wants to fish or cut down trees?

    Otherwise, only recreational fishing allowed with a 3.5 fish limit (with the size of the individual fish in the bag based on income).

    We stuffed up sustainable products like fish or forests in the past by over-fishing and over-chopping, but in ‘theory’ they are sustainable if we keep an eye on the whole system and make sure no one party or no one time period (a group of parties) is getting greedy.

    We stuffed up debt by over-debting but in theory it is sustainable if we keep an eye on the whole system and make sure no one party or no one time period (a group of parties) is getting greedy. Whoops.

    PS Is the collective noun for a group of greedy parties a “bank”?
    Is the phrase “a bank of greedy parties” redundant or do we need to emphasise the greedy part?

    • That’s what the recent US Debt Ceiling debate was all about, Stroppy. They, in isolation almost, have a Debt Ceiling..and when you get to it…what happens……

    • I think you’re right to try to apply concepts from biology to this problem. There are many other disciplines that could be drawn on to re-conceive financial processes….engineering, mathematics, epidemiology, genetics, physics, computing, chaos theory….there must be more.

      The system that now exists is clearly barely functional and could break down completely at just about any time. If we faced this situation with any other mass system, we would conclude that we had problems of design or management or both. This is what we have in finance – a system that has not been thought through (in fact, is hardly even understood) and that is essentially not coherently, pro-actively managed at all.

      So we need to develop new ways of conceiving finance and economics, re-design the way the system operates and then develop the management tools and methods to run the system as a dynamic whole…….can’t say I’m optimistic about that happening, but you never know!

  9. Start with positive real after tax interest rates on deposits. Credit would thus be rationed…substantially I’d have thought
    OK we get into our old arguments about how to do it without sending the currency through the roof. However this gets away from Government trying to determine who is to knit and who is for the tumbrils.

  10. ‘But that, again, leaves banks with no moral hazard (and remember, the GFC started when Lehmann Brothers was allowed to go down because regulators were keen to avert moral hazard — lesson, banks are not subject to moral hazard).’

    Not sure what you really mean by the final comment here. The moral hazard kicked in with Too Big To Fail – ie risky loans made by banks will ALWAYS be repaid by governments when the loan goes pear shaped. This leads to insufficient risk carried by lenders, which leads to more dodgy loans, which is moral hazard. Recapitalising banks is moral hazard.

  11. “nothing to oversee the hyper growth of derivatives or high frequency trading or endless debt games”

    “which is probably why we are all on the brink of losing everything”

    “Money itself is on the line. Equity capital is already in deep trouble”

    “alternative stock market in Australia (to the ASX and ChiX) that bans high frequency trading and CFDs and all the leverage games. Companies are sick, he says, of having price earnings ratios below 10, and dividend yields that are above 10”

    how to get the blog reading, stock market punting populace onside 101?

    blame high frequency trading and CFDs

    like they have anything at all to do with current companies valuations

    come on mate – you can write better than that. leave out all the over simplified emotive bs and stick to the point.

  12. *George Soros, who knows a thing or two about finances, likens the threats to Europe and the United States to that of the dying days of the Soviet regime.

    *“Something similar is happening in the West,” Mr. Soros told Bloomberg Television. “You had a financial crisis where the market did actually collapse, but it was kept alive by the authorities. People don’t realize that the system has actually collapsed.”

    I agree with him.

    Yes, there is a start to healing the financial system – by cutting the blood-flow from the sick parts of the body – remove to poisonous leverage on the real economy – ban derivatives and every instrument that has no real economic value.

    The fundamental purpose of finance is to get the money flowing in the real economy – as opposed to – increasing the ‘paper-wealth’ by stealing and creaming off the other parts of the productive economy.

    The days when one could get rich by inventing and speculating in new ‘financial instruments’ – those that slowly suffocated the financial system – should be over. Forever.

    The financial engineers of this mess should be held accountable. It isn’t that hard to do this – the system could be pushed to extinction by the ‘savers’ – by withdrawing all deposits from the banks.

    There is nothing that ‘the powers that are’ could do to stop a bank run and collapse.

    • +1

      Very well said.

      Too much resources are being poured into (speculation) into these incresingly complex financial instrucments with no real economic or social value.

  13. El Zorro Dorado

    excellent, thought-provoking post –and just starting to tackle the real problems of a global, gluttonous, un-fettered financial infrastructure, and a worn-out framework for finding, allocating and mobilising capital. Our underlying assumptions for pretty much all of what passes as finance and commerce today could do with a detailed re-examination; we ( global society and every country indidvidually) are so far up the wrong track in terms of social and economic allocation and utilization of resources, that the current slide into disruption and unhappiness may be the depression we all had to have.

  14. Edmund Esterbauer

    The statement “Money itself is on the line.” underscores the problem with the current monetary framework. It is not the lack of regulation, but the politicization of money itself. Even if we assume that governments could know what to do in terms of regulation in money markets, it is highly unlikely they would be able to act in the appropriate manner. Once governments are given power, the mechanism of majoritarianism means acting on vested interested. Fiat money by its nature is arbitrary and issued by decree and monetary authority blowing smoke as a communications tool rightly causes angst to market participants. Futures markets are not of themselves the problem. The Babylonians had futures markets. They are essential for the functioning of complex economies.
    Rather than “ Credit is the lifeblood of any economy, and blind governments have allowed credit itself to be debauched, all in the name of the absurd ideology of “free markets”, it should read “Credit is the lifeblood of any economy, and governments have politicized its creation and debauched its fundamental value.” In a global economy, money will move too places where its owners think the return to risk ratio meets their personal objectives. Fear is a bigger motivation than greed. Hence money flows to safe havens during times of uncertainty.
    As for, ” Companies are sick, he says(Peter Strachan), of having price earnings ratios below 10, and dividend yields that are above 10. It may not be long before the Occupy Wall Street movement is matched by an Exit Wall Street movement instigated by big American companies.”, one needs to question the motives. Is it because they pay themselves exorbitant sums when they meet certain balance sheet ratios dependent on the share price? The movement out of Wall Street in that case is not one of fear but greed.

  15. Does all this market volatility bought about by the liquidity created with “complex instruments” benefit the market participents or market operators?

  16. Money can be seen as the capacity to obtain goods and services – ie, to consume.

    If you borrow money, you are consuming more now in return for reduced consumption in the future.

    If you lend money, you are consuming less now in return for greater capacity to consume in the future.

    Every individual’s discount rate for future consumption is different to our expectations for inflation (which is sort of like the discount rate we expect for society as a whole) for a number of reasons, eg mortality, expected changes in life stage etc. Hence some of us choose to borrow, others to lend. Others choose to do neither.

    This has always been the case. The change in the last 20 or so years has been that inflationary expectations have reduced, so interest rates have also reduced. This has meant that consumption now becomes more attractive relatively than future consumption. This has made borrowing more attractive, hence credit levels have risen, even though the burden of supporting that credit may have changed little.

    The credit boom has had little to do with investment. It is almost all about consumption. Lower interest rates mean that to provide for that consumption lenders have to lend more money, ie invest more capital.