Sunday, September 12, 2010

The Financial Sector's Share of Total Domestic Debt

One message that I plan to drive home often is that inflation, deflation, stagflation and economic crises are primarily caused by one thing: financial speculation financed through fractional reserve lending. 

Another message that I plan to repeat over and over again is that the financial sector is the primary speculator.

To support my assertions, I've been reviewing federal reserve data regarding borrowing patterns and outstanding debt levels.  One of the things that I discovered is that the financial sector's share of outstanding debt surpassed that of all other sectors (including the government's share) in 1998, the same year that real disposable personal income went negative. 

(click on chart for larger image)

Another thing I've discovered is that the finance sector's borrowing relative to that of the household sector accelerated in the late 1960s"

(click on chart for larger image)

Is it healthy for a non-productive sector of the economy to have the largest share of outstanding domestic debt, particularly when most of that debt was used to fund financial speculation?  I find it curious that we're so concerned about the public debt, which is much smaller than the financial sector's debt as a share of total domestic debt, when the vast majority of recent public debt was incurred to prop up the financial sector when it lost its bets.  If the root cause of recent government borrowing is the financial sectors' willful bad debts, shouldn't we be more worried about borrowing by the financial sector?