ET CITINGS

For 50 years, private-sector leverage — credit divided by GDP — grew rapidly in all advanced economies; between 1950 and 2006, it more than tripled. But that poses a crucial question: was this credit growth necessary? Leverage increased because credit grew faster than nominal GDP.

In the two decades before 2008, the picture in most advanced economies was that credit grew at 10-15% per year versus 5% annual growth in nominal national income… If central banks had increased interest rates to slow the credit growth, our standard theory suggests that that would have led to lower real growth.

The same pattern and policy assumptions can now be seen in many emerging economies, including in particular China: each year, credit grows faster than GDP so that leverage rises, and that credit growth appears necessary to drive the economies forward. But then, we seem to need credit to grow faster than GDP to keep economies growing at a reasonable rate, but that leads inevitably to crisis, debt overhang and post-crisis recession.

We seem condemned to instability in an economy incapable of balanced growth with stable leverage. So, are future crises, as bad as 2007-08, inevitable? My answer is no, and I argue in this book that it should be possible and is essential to develop a less credit-intensive growth mode.

(From “Between Debt and the Devil: Money, Credit and Fixing Global Finance”)