I'm not talking about government debt. I'm talking about the debt of households and firms. And I'm talking long run, not just the last few years. Over the last several decades, the ratio of debt to GDP has increased a lot. Not just in Canada, but in most rich countries, as far as I know. Why?
I don't have a good answer to that question. Or rather, I have several answers, but I don't know if any of them are good answers. I'm not sure if any of the effects I'm talking about are big enough to matter. And I'm not sure if they fit all the facts.
So I'm going to crowd-source the question.
I'm a bit hesitant to do this, because I know that this is one of those questions that excites popular opinion. And sometimes (not always) excited popular opinion just doesn't make sense. SO PLEASE READ THIS BIT FIRST:
Here are two popular "explanations" that don't add up:
1. "Everybody has been borrowing and spending too much!"
To get debt, you need both a borrower and a lender. Demand and supply. If everyone was borrowing and spending more than their income....they couldn't. Because there would be nobody lending and spending less than their income.
2. "The banks created loans out of thin air, and lent too much!"
Now, banks can indeed create money and loans out of thin air. And when they do that, and people spend the money they borrowed, we get an increase in aggregate demand and a short run boom. But we aren't talking about short run booms here, that last a couple of years. We are talking about a long run secular phenomenon that has trended up over decades. In the long run, when the economy is neither in boom or recession, the demand for loans from people who want to spend more than their income must match the supply of loans from those who want to spend less than their income. Banks can create loans out of thin air, but they can't create real saving out of thin air when real income is bolted down to the long run equilibrium trend line.
So, before answering, think about both the supply and the demand side.
Here are my "explanations", for what they are worth. I think they make theoretical sense, and are not obviously wrong, but I wouldn't claim any more than that.
1. Demographics. Globally, people are living longer, and expect to retire before they die. They want to save for their retirement. Plus, there have been a wave of boomers in many countries (with different dates). Young adults want to borrow to invest in education, houses, kids, cars, etc.. Maybe, just maybe, the world population has had an increasing proportion of people both in the big lending years and in the big borrowing years. So both supply and demand for debt increased, with interest rates adjusting to make up any small differences.
2. Growth of pension plans. Suppose you don't have a pension plan. You save to buy your own investments, like house and land and business, which you can use to finance your retirement. There's no debt. If you do have a pension plan, all your savings go into the pension plan, and you borrow (from someone's pension plan) to buy your house and land and business. So there's debt. Pension plans create intermediation where before there used to be self-financed investments. This caused both the supply and the demand curves for debt to increase.
3. Falling transactions costs. Financial intermediation has gotten more "efficient" over time. The supply and demand curves for debt didn't shift, but it's hard for lenders and borrowers to do a deal. There are "transactions costs" to borrowing and lending, that create a wedge between the supply and demand curves. Over time, those transactions costs have gotten smaller, so the equilibrium quantity of loans has increased. It's just like when a reduction in transport costs brings more buyers and sellers together even for the same supply and demand.
4. The Great Moderation/Minsky. Over time, risks of unexpected inflation or deflation, and risks of booms and busts, and financial crises, and political and legal risks, have become smaller. So it's been perceived as safer to borrow and safer to lend. So both the supply and the demand for loans increased.
I don't really find any of those explanations especially convincing.
Remember, it's demand and supply. And if you shift only one curve, remember what should happen to interest rates?
Anyone got good graphs, showing private debt/income ratios back over several decades? (Canada good, but any countries good too.) I know I've seen them, and it's doubled or trebled or quadrupled or more since the 1950's. But I've forgotten where. Thanks.