The Credit of the World

The UK Telegraph reported today on the recommendation of the World Economic Forum report on global credit.  The report says the world must double its existing amount of credit to support economic growth.  That means adding another hundred trillion dollars in credit over the next decade.

 The global credit supply actually doubled during the 1990s, so this is not quite as mind-blowing as it sounds… but of course, much of the world is nervous about floating a huge amount of new credit after the financial industry meltdown.

The WEF report says “pockets of credit grew rapidly to excess, and brought the entire financial system to the brink of collapse,” but emphasizes the importance of credit as the “lifeblood” of the global economy. 

Credit allows business to take advantage of opportunity, which comes and goes quickly in the modern world.  Imagine a child who notices a lot of thirsty people walking around his neighborhood, and runs home to borrow some money to open a lemonade stand… but is told by his father that he must save up his meager allowance for weeks to buy the materials himself.

Credit also enables consumers to purchase products that would, for all intents and purposes, be impossible to obtain otherwise.  What would America look like, if cars and houses had to be paid for in cash?  How many high-end consumer goods would never have been developed, if manufacturers knew the only customer base would be people that could buy them without swiping a credit card?

Both kinds of credit can be abused.  The modern era of bailouts and “too big to fail” represents a political decision to eliminate risk for favored companies, by spreading the consequences of failure across the entire population.  Consumers get into trouble by overextending themselves all the time, once again tempting political intervention in return for votes.  And, of course, the government itself is a titanic consumer of credit, all across the Western world.

The State’s use of credit is an exact mirror image of commercial applications.  A private industry borrows money to take advantage of opportunity now, in the expectation of future profit.  The transaction is designed to produce a net increase to overall wealth, because both the borrower and lender profit.  Borrowers who manage their enterprises poorly, or lenders who give out money irresponsibly, are weeded out through bankruptcy. 

Government, on the other hand, borrows money at the modern trillion-dollar clip to purchase votes, whose effects are entirely ephemeral.  The easiest way to buy votes is to establish obligations that future politicians will have to pay for.  The transaction is not designed to generate wealth, because the ultimate recipients of the money “repay” it through votes that instantly lose their “value” after the next election… causing the process to begin again.  One would expect such a series of transactions to produce a rising mountain of debt.  Evidence from every corner of the modern world confirms that expectation.

The world has nothing to fear from doubling its stock of credit, if the process is conducted between willing lenders and borrowers, who must accept the consequences of their judgment.  Allow politics to remove those consequences, and credit becomes an explosive powerful enough to demolish any economy.  There is a difference between using it to pursue opportunity, and defer repercussions.