Headline Nov 12, 2014/

''' DEBT : 


Much the same is true of household borrowing. They calculate that the odds of a recession are about one in a ten when household debt is in line with its trend. 

But when it exceeds that trend by 10% of GDP,-

As it did in some of the worst afflicted countries before the crisis, the chances of a recession rise to about 40%.

Rather than looking at borrowing, other economists look at lending. They worry when credit from banks and other lenders to households and firms grows much faster than GDP:

As it did before America's crisis in 2008, Japan's in 1991 and the Asian crisis of 1997.

Economies can succumb to long  ''financial cycles'', according to Claudio Borio and his colleagues at the  Bank for International Settlements.

Whereas a traditional business cycles  manifests itself in the rise and fall of growth and consumer-price inflation, the financial cycle consists of longer, wider swings in credit and asset-price inflation.

Why does credit sometimes depart from a prior trend? It may depend on what it is spent on, argues Richard Weiner of Southampton University. When a bank makes a loan, it credits the money to the borrower's deposit account.

In so doing the loan adds to the money supply. If that money is spent on a new car, factory or other freshly produced good, it contributes to demand, helping the economy to make fuller use of its productive capacity.

If the economy is already near full capacity, it will probably just raises prices instead. But either way. the bank lending will add both to debt and to nominal GDP, the money value of economic output, leaving the ratio of debt to GDP largely unchanged.    

However, loans can also be spent differently. They can be used to buy existing assets, such as homes, office-blocks or rival firms.

Since the asset already exists, its purchase does not add directly to GDP, which measures only the production of new good and services. As a consequence, debt increases, but GDP does not. 

Furthermore, the purchase of an asset, such as a home, will help push up the market price of that  asset. Other home owners will then become more willing to take on debt  (because they feel wealthier)  and more able to do so-

(because their home's value as a collateral has risen).

In the year's before the crisis, the net worth of American households continued to rise despite their accumulation of debt, because their and other assets appreciated even faster.

Borrowing to buy assets this has a self-reinforcing effect: one person's purchase makes another's borrowing both more desirable and feasible.

Eventually the financial cycle peaks.  

The Honour and Serving of this  operational research continues. Thank you for reading and see Ya all on the next one.

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