Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.
I think we’re at a major turning point in the U. S. economy. Housing and the associated credit will not be the engine of growth going forward that it has been for nearly all of my lifetime.
We have been there before. The primacy of housing in economic growth isn’t a law of nature. It’s an artifact of demographics, policy, and history.
We’re going to need to find something new. In all likelihood there won’t be one main overwhelmingly significant economic driver but lots of less significant drivers. Whatever they may be they won’t be education or healthcare. Each of those depend too highly on government spending. They’re drags rather than engines of growth.
Waiting for housing to recover or, worse, targeting policy at such a recovery is a waste of time, energy, and money.