What's behind the credit boom?

Apparently, the credit crunch is causing people to borrow more.
No, it doesn't make much sense, does it? So there might be something else behind the big rise in personal borrowing in February reported by the Bank of England yesterday.
That rise is consistent with the fact that retail sales were strong in the month too. And there's a reason for this which is obvious on the high street but which City economists, understandably obsessed with financial market conditions, are overlooking - technical progress.
The prices and quality of gadgets - flat screen TVs, sat navs, games consoles - are improving rapidly. And this is boosting demand for high-ticket goods and therefore credit.
We can roughly quantify this. RPI data show that the rate of deflation for audio-visual equipment (which includes computers) has recently been running at a record rate - 20%. Big price falls are usually a sign of technical progress.
And our chart shows that there's a rough link between this rate of deflation and retail sales volumes growth in the subsequent 12 months; troughs in sales growth (in 1998, 2003 and 2005) followed low rates of technical progress and peaks (1999, 2004) followed rapid progress.
There are many reasons why there might be a lag; people are slow to realize what's on offer; they wait for prices to fall further; they have to talk the missus into wanting a 42in telly; or, if you're like me, it takes time to get round to buying stuff.
Whatever, this progress is helping to raise demand. And past relationships suggest it might continue to do so.
There's more to the economy  than the credit crunch. And perhaps real business cycle theorists  are onto something in emphasizing the importance of productivity fluctuations as a cause of booms and slumps - because these can affect activity via consumer spending, as well as capital formation.

Comments

[Matthew Cain]

It's posts like this that make me pleased I found this blog.

[Bob B]

News of the Real Business Cycle Theory seems not to have reached the Bush administration or the US Congress:

"But now, after more than three decades in the wilderness, Keynesian-style fiscal policy seems to be staging a comeback. On February 13th George Bush signed into law individual tax rebates and temporary investment incentives worth $152 billion (just over 1% of GDP) this year, and $168 billion in total. Passed in record time by the normally sluggish Congress—and before recession is even a certainty—the stimulus is aimed at cushioning America's downturn by getting cash into consumers' pockets and encouraging firms to invest."
http://www.economist.com/finance/displaystory.cfm?story_id=10697166