It has been exactly 10 years since the economic crisis started. On August 9, 2007, the French bank, BNP Paribas, announced that investors in 2 major investment funds of the bank could not access their money. Those funds had invested in American mortgages, which everyone thought 'that's all right'. That was the beginning of the worst crisis since the Great Depression 100 years ago.
Lately we have been reading more and more often that the crisis is almost behind us. Economic growth is picking up and unemployment is falling, all because consumers are letting their money flow again after a year-long hiatus. Our consumption is increasing and that ensures economic growth. The fact that house prices are rising again at a rapid pace, and are now higher than on August 8, 2007, is a sign for many economists and policymakers that the bad times are behind us.
I enjoy reading and hearing many stories. It is more pleasant reading than reading for the umpteenth time how miserable the situation is. But at the same time I actually find it sad. Our policymakers and many economists have actually learned nothing.
Debt crisis
It is not without reason that we call the current crisis a 'debt crisis'. The core of the problem is that governments, companies and households have built up enormous debts over time. As debts increase, a larger part of our income is spent on interest payments and repayments. At the same time, we cannot spend those euros. In short: the euros that keep our economy running.
That wasn't a problem for a long time. We made up for it by borrowing even more. In this way, people could cough up interest and repayments and continue to spend more and more. The misery only started when the debts became so high that the banks wondered whether they could still be repaid. The banks subsequently refused to issue new loans. The fuel supply to the engine stopped. Common sense tells us that the crisis will really be over when those debts become lower. Did that happen?
The Bank for International Settlements (BIS) reports that household debt in developed countries is actually higher in 2017 than in 2007. The situation is no different for governments. Western countries, where the national debt has not or hardly increased since 2007, can be counted on the fingers of one hand.
High debt is very bad
The BIB experts also looked at the effects of high household debt on economic development. They used data from 54 countries since 1990. The good news is that when households are deeply in debt, economic growth is boosted. The bad news is that this is only the case for 1 year. After that year, those debts actually drag down growth. The higher the debt, the stronger the dampening effect on growth. That effect is especially strong when household debt exceeds 80% of the total economy.
In developed economies, household debt is at 80%. The Netherlands is in the top 3, with a debt of almost 120%. Only in Denmark and Australia do households carry higher debt. In many countries the trend is also increasing.
Our policymakers are doing everything they can to increase the debt. And when that happens, they cheer along with many economists. It is telling that many economists and analysts look at lending when they want to gauge the state of affairs in an economy. If that increases, then that is good news and the champagne bottle can be opened. That is very shortsighted. The BIB teaches us that that sweet part is short-lived and quickly mutates into a long-lasting sour feeling.