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Learn To Love Trillion-Dollar Deficits


It's a good concept. But very hard to pin down. For instance, if I buy things on credit from Home Depot then I am funding all sorts of residential investment. If I borrow from the bank to build a new house I am also funding residential investment. How does one calculate which form of residential investment was funded by the "better" form of credit? Nearly impossible to say....

Prof R.A.Werner appears to think that it is possible.

Importantly for our disaggregated quantity equation, credit creation can be disaggregated, as we can obtain and analyse information about who obtains loans and what use they are put to. Sectoral loan data provide us with information about the direction of purchasing power - something deposit aggregates cannot tell us. By institutional analysis and the use of such disaggregated credit data it can be determined, at least approximately, what share of purchasing power is primarily spent on ‘real’ transactions that are part of GDP and which part is primarily used for financial transactions. Further, transactions contributing to GDP can be divided into ‘productive’ ones that have a lower risk, as they generate income streams to service them (they can thus be referred to as sustainable or productive), and those that do not increase productivity or the stock of goods and services. Data availability is dependent on central bank publication of such data. The identification of transactions that are part of GDP and those that are not is more straight-forward, simply following the NIA rules.”