Bubbles, Credit and Their Consequences, page-2

I'll also share this excerpt below from the research of Colin Twiggs, an excellent economic analyst. I highly recommend subscribing to his 'Trading Diary' for up to date global economic information that actually matters. Full credit to him and his sources for what's below:


''Anna Schwartz spoke on the issue in a 2008 interview with the Wall St Journal. Then 92 years old, the co-author with Milton Friedman of A Monetary History of the United States (1963) nailed the cause of asset bubbles:

If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates .....

The problem is not asset bubbles, whether they be in stocks, housing or Dutch tulips. That is merely a symptom of a deeper malaise: too easy monetary policy. The real threat is the underlying credit expansion that caused the problem in the first place.
And while asset bubbles may be difficult to measure, credit bubbles are easy to identify. If credit grows at a faster rate than GDP, that is a credit expansion. The ratio of credit to GDP should be maintained in a narrow, horizontal band.



Easy to monitor and easy to correct, if you are looking in the right place. But central banks are good at looking elsewhere — and closing the gate long after the horse has bolted. A similar problem is evident in Australia.



Even worse if we look at household credit to disposable income (on the left below).



Unfortunately the horse has bolted and attempting to contract the level of debt would cause a deflationary spiral with devastating consequences. The only way to restore sanity is to hold debt steady at current (nominal) levels and allow growth and inflation to gradually reduce the GDP ratio to more stable levels.''