Friday, August 08, 2003

Behold the power of debt. From the City Editor of London's Daily Mail today (sorry, no link):
Cambridge economist Wynne Godley, a veteran observer of the mistakes of Britain's economic past, has come back to haunt FT readers. He argues that the danger at present arises not because debt is too high, but because lending is too high.

During the past five years, net lending has risen from 5% to 15%, giving a supercharged boost to personal spending. Godley suggests that this has been enough to account for the entire growth in gross domestic product since New Labour took power in 1997.

He believes this will eventually become dangerous because the collateral against which the borrowing has been done will "eventually be exhausted".

The result will be that the burden of repayments will eventually lead to the precipice of bankruptcy and collapse.
Monetary policy in the US has been far looser than in the UK, so one might think the danger is higher on this side of the Atlantic. However, the world is dying -- literally in some cases -- to lend to the American consumer in order to keep this dysfunctional global engine running. Will the Fed, US bankers or global financiers really pull the plug? It's not in their interests to do so, after all. As the old saying goes -- if you default on $1000, that's your problem. If you default on $500bn dollars, that's the bank's problem.

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