Monday, November 1, 2010
This post arose from today's assessment of the September credit aggregate statistics. As noted in the post, lending is still a mix of consumer strength and business weakness.
From a longer run perspective, this blogger is interested in this ongoing divergence because it reinforces an historic trend toward consumer lending, completely dominated by mortgages, and away from business lending. Throughout the Western world, this process has been dubbed "financialisation" and has been underway for several decades.
It began with the nineteen eigthies deregulation of financial systems, as well as economies more generally, and has seen many formerly stable (and regulated) dimensions of an economy, such as housing and labour, transform into liquid and tradable assets.
The process is causal in the shift away from industrial output for Western economies because in a world where all assets are tradable, labour-intensive industries migrate to the lowest cost countries.
Until the GFC, loss of this industrial production in Western economies was cushioned because the savings of the emerging industrialising countries were recycled as easy credit by the agents of Western financialisation (banks). The resulting rise in Western asset prices boosted consumption.
The GFC ripped away this cushion when the banks doing the recycling inconveniently choked on their own innovations around the movement of this capital.
So, is the divergence in the RBA's September credit aggregates part of this structural shift or just a cyclical blip, as Rick Battelino of the RBA argued recently.
To help find the answer, this blogger graphed the history of business lending as a ratio of total credit for the US, UK and Australia since 1990. The chart is above.
Clearly, for the US and especially Australia, there is nothing cyclical about the trend (which is not to say that there aren't cycles within the trend).
For the UK, the trend is less clear. Unfortunately the Bank of England only provides the data back to 1997. Nonetheless, this blogger is willing to bet the same pattern will hold, if more muted than the other two. The Thatcherite deregulations of the late eighties make it very likely.
What is also obvious is that, after the GFC, the trend is now broken in the US. Some of the reversal can be attributed to deleveraging by consumers, thus increasing the percentage weight of business borrowing. But not all. US lending to real businesses is now growing in absolute terms and approaching new highs. Real (non-financial) commerce is bouncing back even as mortgages slowly decline.
In the UK, the trend has been interrupted but has not yet reversed. However, two forces look set to complete the reversal. First, housing is still weak and mortgages are likely to decline with housing. Second, given the weakening pound and ongoing quantitative easing, increasing competitiveness should, over time, stimulate externally led growth and new business borrowing.
For Australia, this blogger notes that the chart does not show the equity raised by many firms during and since the GFC in place of the overly priced debt offered by the banks. However, this is not enough to convince that any reversal in the overall trend is in the offing.
Which is a problem because if we shift angle for a moment and graph mortgage debt as a percentage of overall credit, we get this:
Of the three countries, Australia is the one that has undergone by far the most profound structural shift in the sectoral distribution of credit. This blogger believes that this reflects the deepest distortion of the underlying economy as well.