Decide for yourself based upon this simplified analysis using publicly available data.
There is no direct link between credit and economic expansion, but the US in the 1990s is a case study in whether or not credit formed a significant component to economic expansion. Many economists do not agree that credit was the cause of economic expansion, but an effect. For example, Dr. Michael Walden of North Carolina State University indicates that most economists attribute the major underlying cause of the current expansion to business investment in productivity enhancing technology and equipment, and that an expansion in consumer borrowing is a result of the expansion and not the underlying cause. Whether credit expansion is the cause or an effect is not straightforward to prove, and there are opinions both ways.
...what's the facts on national consumer credit?...
Take a look at (graph up) the data at
Federal Reserve historical data on consumer credit. The raw data
shows over a 90% growth in credit during the '90s. When one adjusts
these values for
Department of
Labor historical statistics of the Consumer Price Index, one finds that
total consumer credit has grown by 70%.
Recall the economic slowdown in 1990-91? In this data, one can trace the slowdown in credit growth (the S&L thing was an important event at this time, of course). Reflecting on this, it is interesting to muse, was this the reason that GHWB lost the 1992 presidential election?
An adjustment needs to be made for growth in real per capita earnings since as real income grows so does the capacity to carry credit. One can do this using the data from the Department of Labor. Click "Most Requested Series", and then pick an appropriate earnings category. When using that data to adjust the consumer credit values, in the last decade there has been a 30% increase in real individual income for the nation (non-government). Scaling the 70% personal total credit growth against the income growth yields a net 30% growth in real consumer credit carried.
Where next? Two obvious questions come to mind:
...how much has individual credit really been growing?...
Personal credit amounts are currently about $6k/person according to
the aforementioned Federal Reserve data.
The average household (2.6 people, $55k/year income ... historical data from the
Census Bureau
household income tables)
carries ~ 16 k$ in credit. This is a credit/income ratio of ~ 0.3.
Applying this factor to the previously determined 30% credit
growth/decade (or ~ 3% growth/year) by straight multiplication, then only
about 1%/year would be attributable to credit growth IF the multiplier
factor were only equal to 1.
When you go out and buy something, of course, the money doesn't die, it gets multiplied through the economy with the sellers spending that money. The multiplier factor for such credit purchases is uncertain, but it is obviously greater than 1 and probably between 2 & 4 on national scales. See, for example, discussions and justifications for choosing particular multiplier factors at
...how does that compare with the growth of the economy?...
GDP in the US has grown by about 31% in the last decade (see
The Bureau of Economic Analysis'
historical data on GDP ), or about 3%/year. Depending
upon the multiplier factor, you can see that credit probably makes up a
substantial fraction of the GDP growth just by itself.
There is at least one more important factor in the the GDP that we can adjust for in this simplified analysis: population growth in the work force. Between Jan 1, 1990 and Jan 1, 2000, the US population grew from 248 million to 275 million .... (source data Census Bureau's population statistics ) or about 10%. Assuming the workforce proportion is similar, the GDP adjustment per capita yields a growth rate of about 2%/year.
...What does this all mean?...
Conclusion 1: if the per capita GDP growth rate
is ~2%/year, then credit growth--which is an absolute minimum of 1%/year
and probably higher--makes up the bulk of the US economic growth in the
1990s.
...but what about productivity?...
Isn't productivity the source of the economic expansion? Productivity gains between 1990-2000 were about 25% ( Bureau of Labor Standards Productivity Statistics ) and outstripped per-capita CPI-adjusted GDP gains which were about 18%. If GDP gains had exceeded productivity gains, then the increase in credit is a consequence, all else equal. But with the percentages reversed, productivity does not appear to yield as much "gain" (to use an engineering term) on economic growth as one would hope to see.
The amount of credit that can be carried is a function of the interest rates, which of course cannot be reliably forecast into the future. Nevertheless, credit organizations and lenders set standards on debt/income ratios for the purposes of approving loans. If one uses the "house buying" standard for how much credit a family can carry before they refuse to loan you any more money, then growing credit at 30% per decade from the household national average of 0.3 debt/income ratio doesn't allow this to go on for too many decades before the creditors pull the plug. The equation below is a crude calculation of the limit to such expansion in terms of the number of decades of allowed credit growth:
log[ (Creditor Limit Debt/Income Ratio) / (Current Debt/Income Ratio) ]
_______________________________________________________________________
log[ 1 + Credit Growth/Decade]
For example, if one allows a generous limit on allowed credit of 3-times
yearly-income, then the limit allowed on such growth is at most 9 decades
before credit extension can no longer be supported. Positing this limit
ignores that it is optimistic. There is good reason to think that rate
could not be sustained anywhere near that long...
Conclusion 2: Current rates of credit growth can continue for a few
decades at most. Inflation or an upward surge in interest rates on a
massive debt could be economically crushing to the individuals carrying
the credit.
Personal credit isn't our only problem. At 5.7 trillion dollars, our national debt is about 3-times the amount of our personal debt. At current interest rates, about a third of a trillion dollars is needed every year in taxes just to pay the interest. This is money that was spent on you and your needs. You either have to pay it back or continue living with taxes to pay the interest. If we were to let the economy get away from us and have inflation rise, interest rates would rise. At 12% interest rates, we would need another third of a trillion in taxes every year just to stay even.
The next decade or two are the best opportunity we have of paying off the national debt. From the previous analysis, an important problem with this opportunity is that the means through which the economic engine is currently primed may be through personal credit. So, while we may theoretically be able to pay off the debt this way, it may be at the expense of mounting personal credit unless the ratio of taxation-to-government spending is adjusted.
One does not have to accept the proposition that the current economic expansion was fueled by credit to recognize that such an expansion can not and will not continue indefinitely. ...in which case, doesn't it make sense to start paying off the national debt ASAP and at as quick of a rate as we dare support?