April 2nd - Borrowing oils the wheels of growth

While going through our latest financial crisis the the words 'credit crunch' lead me nicely into how credit supports capital growth.

To grow, capital needs consumers to buy its products, so if wages are low the credit card comes to the rescue because it's a very effective way of encouraging people to buy things for which they don't have the ready funds.  Lack of money is now no impediment to someone buying something – a home, a car, fitted kitchen and the rest.  If you can’t afford something then you can usually buy it on credit. So, capitalism's need for growth has turned huge numbers of people into borrowers, often with a very high rate of interest.

Tim Jackson -  among many others I’m sure – identified the ‘rise and rise’ of personal debt as a major feature of advanced economies in the period preceding the 2008 financial crisis.

Interesting to me in my search for a 'simple' answer to what's gone wrong in our world are the different forms of capitalism which Harvard historian Peter Hall and Oxford economist David Soskice identified:

‘Liberal market economies’ such as Australia, Canada, New Zealand, the UK and US,  led the way in liberalising, encouraging competition and deregulating the markets.

The so-called ‘co-ordinated market economies’ such as Belgium, France, Germany, Japan and the Scandinavian countries, were much slower to de-regulate.

Although both varieties of capitalism agree on the need for growth a key difference is that liberal market economies have encouraged higher levels of consumer debt than co-ordinated market economies.

It’s pretty staggering to read that during the decade before the 2008 crisis consumer debt in the UK more than doubled.  By the end of 2008, the consumer debt stood at almost £1.5 trillion which was higher that the GDP for the second year running.  The figures blow my mind really - it doesn't seem right somehow.