The real financial crisis in the U.S. and in other countries did not take place in the banking or the wider financial sector -yes banks and others financial institutions were affected by their own induced excessive lending schemes- but no, it seriously affected the individual households. More than 40% of the 53 million home owners who had a mortgage in the U.S. were affected by foreclosure proceedings over the period 2004-2012. Out of those 21.4 million households 5.4 million had their homes repossessed. Between 2006 and 2010 an additional 7.8 million Americans lost their jobs. Mainly as a result of the economic slowdown, between 2006 and to-day the U.S. government doubled its debts from $8.5 trillion till just below $17 trillion to-day. On top of this individual households lost $12.6 trillion in net worth in 2008, more than the total debt level on home mortgages in that year which stood at $10.5 trillion. The focus of many economists is to find a general economic equilibrium and to study the relationship between money supply, inflation and economic growth levels. From above headline figures one can conclude that the U.S. economy was as far from a general equilibrium as one could possibly imagine. One may also conclude that it was not the money supply which changed dramatically (M2, seasonally adjusted, grew by 4.7% in 2003, 5.96% in 2004, 4.5% in 2005 and 5.76% in 2006), but rather the use of funds over the four years preceding 2008, which led to house price increases of over 30% in the three year period 2003-2005. It was the “abuse of funds” over the latter period which led to the subsequent losses in jobs, in incomes and net worth and in a reduction in economic growth rates which has lasted up till to-day. It was also one of the main causes of the growth in U.S. government debt over the last 7 years. In this paper a “use of funds” theory will be developed, which will be based on actual economic developments, rather than on hypothetical links between money supply, inflation, and economic growth. Emphasis will be placed on the two main long term borrowing levels which affect individual households: home mortgages and government debt levels. The borrowing behaviour of the company sector will not be a subject of discussion as a misallocation of funds to these companies will usually lead to bankruptcy, which means the company seizes to exist. Neither individual households nor a government disappear in the same manner. Emphasis will also be placed on the costs of debt and the accumulation of savings in pension funds in this use of funds theory. It will be demonstrated that issuing (part of) government debt in an index linked manner is an ideal tool to lower the costs of funding for the three countries under consideration: the Netherlands, the U.S. and the U.K. Such funding will also act as an anti-cyclical instrument in times of slow or negative economic growth. The negative interest rate effects on fixed rate bond portfolios as a consequence of discontinuing quantitative easing can be counteracted by temporarily increasing the volume of index linked bonds. The aim of this paper is to provide an insight into the links between lending activities, inflation, interest rates, economic growth and the ambition to provide for future incomes out of individual households own savings, rather than relying on a transfer system from those in work to those in retirement.
