Debt, the financial sector and economic growth

Someone who occasionally reads and comments on my older blog has a formulation of real growth: increase in GDP less increase in debt. I've finally taken the bait and invested time to look at this, for the UK, and it's intriguing.

First, I've taken figures for M4 bank lending, from the Bank of England's website. This gives the quarterly increase as a percentage, re-expressed as an annual equivalent figure. I've used Excel to average the four quarters for each calendar year. Since the information is only available from partway through 1963, I use the estimated annual percentage increase from 1964 onwards.

For GDP, I use the Measuring Worth site and the "UK nominal GDP" figures (i.e. x million pounds, not adjusted for inflation), and again give the percentage increase year-on-year (the last available year here is 2008).

Here's the resulting graph for increases in M4 and GDP (click on graph to enlarge):

What is obvious is that apart from a short time in the early 1990s, lending has risen far more than GDP for the last 30 years. That extra money went somewhere, and it seems that all it did was inflate asset prices, in the stockmarket and in housing, at the same time that global trade has kept down wages and consumer prices.
Between 1964 and 1981, GDP increased by an average 12.69% and M4 by 15.16% - a difference of 2.48% per year. But from 1982 to 2008, GDP increased annually on average by 6.63% and M4 by 12.32% - a difference of 5.69% p.a. Compounded up over the past quarter century, that extra difference may explain how financiers have become so large and powerful. In the USA, according to Robert Creamer , the financial sector accounted for 8% of national GDP over the last 10 years, but made 41% of the profits.
I can't say when it will end, but equally I can't see this going on forever. This is why I am inclined to listen to the Jeremiahs who warn us of further economic setbacks, despite strong recent rises in the stockmarkets.
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