Leveraged Growth: Endogenous Money and Speculative Credit in a Stock-flow Consistent Measure of Output

Modern Monetary Theory (MMT) as well as Stock-Flow Consistent (SFC) modelling have both had significant implications for economic theory in recent years. Neither, however, had any meaningful impact on the key measurement of output, Gross Domestic Product (GDP). While balance sheets have been nominally included in national accounting systems since 1968, main aggregates such as GDP are still blind to the creation and flow of credit (and hence debt). The financial sector is only presented in GDP as a provider of services, not as a producer of credit and thus money. Following Schumpeter's (and Bezemer's) functional differentiation of credit, this paper separates finance into two parts - credit to the productive sectors and credit for speculation (i.e. for purchasing financial assets and real-estate). The former grows at the same rate as GDP, while the latter grows faster, increasing aggregate leverage. A systemic leverage index is then constructed from flow-of-funds data for the US (1960-2015), and used to render real GDP stock-flow consistent. Debt-adjusted GDP is theoretically and methodologically more consistent than GDP, and also correlates better with aggregate employment. The paper concludes by discussing the implications of debt-adjusted output for the trend and volatility of growth, as well as some thoughts on the gap between measurement and theory in economics.