BIS: Kanosian debt cycles cause secular stagntion

UK Telegraph: Credit bubbles are corrosive. They gobble up resources on the upswing, diverting workers into low-productivity sectors and building booms. In Spain the construction share of GDP reached 16pc at the height of the "burbuja" in 2007, when teenagers abandoned school en masse to earn instant money erecting ghost towns.

Parasitical wastage creeps in. "Financial institutions' high demand for skilled labour may crowd out more productive sectors," said the paper, acidly.

The bubbles leave a long toxic legacy after the bust hits. This takes eight years or so to clear. "The occurrence of a crisis greatly amplifies the impact of previous misallocations," said the paper, racily titled "Labour reallocation and productivity dynamics: financial causes, real consequences".

Crippled economies have to make the switch back to healthier sectors against the headwinds of a credit crunch and a broken financial system, and typically amid austerity cuts in public investment.

The BIS has long argued that a key reason why the US recovered more quickly than others is because it tackled the bad debts of the banking system early, forcing lenders to raise capital. This averted a long credit squeeze. It cleared the way for Schumpeterian creative destruction.

The Europeans dallied, prisoners of their bank lobbies. They let lenders meet tougher rules by slashing credit rather than raising capital. Europe's unemployed have paid a high price for this policy failure.

Claudio Borio, the paper's lead author and the BIS's chief economist, said the "hysteresis" effect of lost productivity is 0.7pc of GDP each year. The cumulative damage from the boom-bust saga over the past decade is 6pc.

We boom and bust as the Swamp bails and subsidizes, the evidence is clear.