Among the many useful man-made „artifacts“, money is probably the most versatile. It is not only a means of exchange for trading goods and services; it also provides an easy and simple store for previously generated wealth.
The importance of money has grown over the course of thousands of years, yet only during the past few centuries has it made inroads into most people’s lives. Along with this rise of money’s role, debt has become a close companion. Originally mostly used to finance government and trade, it is now present everywhere. One way to see credit is that it serves as a way to make the benefits of an individual's or a company's future surpluses available today, by enabling investments or consumption before having saved enough to make a purchase happen. This obviously comes at the price of interest.
The contribution of debt to the generation of economic output has so far been only partially analyzed in economics. There are some aspects researched in Keynesian macroeconomics, regarding the positive effects of debt-funded government spending on total output (i.e. GDP). Also, the impact of growing private-sector debt on economic growth has been investigated by some researchers, mainly for emerging economies, to show a positive effect. For the most part, however, economics sees debt as neutral in respect to output, as it assumes that credit simply transfers consumption or investment activity from one entity (the creditor) to another (the debtor). Our models question this view, as credit almost always introduces a temporal shift, bringing consumption or investment planned in the future (e.g. in the form of someone's savings, pension money, etc.) to immediate use in the present by the debtor. And increasingly, spatial shifts play a role, where borrower and creditor are in different economies. Also, in today's financial markets, debt is no longer necessarily created from past savings, but instead credit generation and savings growth go hand in hand.
Our research so far demonstrates a direct correlation between new debt incurred in an economy and economic output. “Productive debt” – as we label the debt used for consumption or for buying investment goods and not for financial speculation – directly contributes to GDP in the year it is generated, and it “echoes” back in the economy in later years. On the other side, it shows that debt service has significant negative effects on future growth. Our models so far are able to solidly explain recent economic growth in light of fast growing debt (both private and public), and equally well predict economic decline from credit contraction or austerity programs in critically affected countries during the recent crisis.
One of the challenges for the future of most economies comes from the fact that for decades, debt levels have consistently been growing at a faster pace when compared to economic output (GDP), to levels close to or even above their theoretically sustainable maximums. Consequences are twofold - growing defaults of debt once it reaches unsustainable levels, and the inability to grow debt further, which in turn limits economic growth.
Our research projects cover a number of topics in this area:
- Overall monetary transaction model (cradle-to-grave analysis for entire monetary systems)
- Effects of debt fluctuation on economic growth
- Role of debt and credit in economic growth and decline