Posted by: Dirk | November 4, 2013

It’s house purchases, stupid!

The ECB Monthly Bulletin of October 2013 has a box named ‘Stylised Facts of Money and Credit over the Business Cycle’. On page 20 they write:

The strong relationship between household loan growth and the business cycle is largely due to loans for house purchase, which are the main component of household loans. Loans for house purchase exhibit a strong correlation with real GDP growth and lead the cycle slightly, by one quarter on average (see Chart D).

This connects quite nicely with the idea of private deficit spending having replaced public deficit spending as the main driver of growth (not that government deficits were zero). The build-up in household debt in the countries with a real estate boom was unsustainable , since households do face a budget constraint whereas normally sovereign governments do not. Only when a central bank refuses to cooperate a government might encounter a budget constraint, as was the case in Greece. With falling house prices in the euro zone as we have seen them in the last couple of years a recovery via (another) real estate bubble seems unlikely, as data from the European Commission show:

House_Price_Indices_euro_area_and_EU_aggregates_Index_levels_2010_100_2013Q2We need a new growth model. Either that or we get another bubble.


  1. This chart also shows multiple implications:
    Economic growth is determined by debt growth.
    Monetary policy can not prevent debt/ money growth.
    By trying to prevent money growth, monetary policy shifts money growth into particular sectors which is causing the bubbles.
    Gold Standards still can not prevent debt/money growth (money printing by private sector) but it ensures to hit the ceiling of money printing by private sector when panic starts.
    Low inflation is causing debt bubbles, and low inflation is caused by wage stagnation.
    If wages in general population are not growing, debt will replace buying power and create bubbles in some economic sectors instead of in all sectors as wage growth does.
    SInce monetary policy follows Taylor rule and Philips curve, which provide leads on inflation/employment relation (that is for sovereign currencies and surplus countries only), low inflation indicates low wage growth and with it low buying power.

  2. […] two issues belong together. If another bubble doesn’t happen (see my post from yesterday), demand must come from somewhere. HIgher wages and more government spending is an […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: