Credit may not drive economic growth. It’s a widely-held finance truism but nobody has ever proved it.
Maybe credit is a follower, not a driver, of the boom-bust cycle. Maybe credit grows when the economy is growing, because of the need to finance investment, and shrinks when the economy is shrinking, because of the lack of investment. In retrospect, looking at a chart of credit growth vs. GDP growth, it might look like credit caused the cycle, but in fact it was just a passive tag-along. Maybe the cycle was caused by something else — productivity changes, or changes in monetary policy, or changes in people’s sentiment and animal spirits.
The academics have good reason for being skeptical. After all, production isn’t the same as consumption. In the example of me borrowing to buy a TV and car, my debt binge doesn’t make my salary — my production – go up at all. But in an economic boom, a country’s total production really does rise — that’s what fast growth means. In other words, if credit fuels economic booms, then it must do it in a fundamentally different way than the way it fuels a personal consumption binge.
Another reason academics are suspicious of the theory of credit-fueled growth is that when we talk about “credit” at the national level, we mean gross, not net. Most of the money that gets borrowed during a boom is borrowed from people in the same country . If taking on debt lets a borrower increase his consumption, why doesn’t making that loan force the lender to decrease his consumption? In other words, if credit is just one American lending to another, or one Chinese person lending to another, why does it boost growth?