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Saving, Asset-Price Inflation, and Debt-Induced Deflation

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  • #46
    Re: Checkmate

    Originally posted by Rick Ackerman
    "i actually do think a lot of what hudson delineates is important and scary. the simplest way i summarize his argument is by looking at the growth of debt versus gdp. i think that it currently takes about 5 dollars of debt growth to get 1 dollar of gdp growth. the ratio of debt to gdp growth has itself been rising steadily. if interest rates were 20%, for example, 5 dollars of debt to 1 of gdp would be checkmate- the whole of the gdp growth would be required to pay the interest on the corresponding debt. of course interest rates are lower than that, but that's the idea, isn't it?"

    ***

    Recent data (per Richebacher) suggest that it is taking closer to $10 of borrowing these days to produce that marginal dollar of GDP growth. In any event, it is the real, not nominal, rate of interest that matters. If, say, mortgage rates were at 6.5% at a time when home values were falling by 10%, THAT would be checkmate, since it would subject tens of millions of homeowners to implied real rates of 16.5%. Come to think of it, isn't that about where we are right now?
    It is, but asset inflation can do an awful lot to make this nominally better, can't it?

    In the UK it looked like housing peaked about 2 - 3 years ago as I recall, but housing started to appreciate again. Isn't it possible that re-inflation will begin raising wages and goods prices and houses will stop losing value?

    The $10 of borrowing could become $20 of borrowing, couldn't it?

    Is there some limit to this, really? Maybe there is but maybe we're a lot further away from it than we think.

    I don't really believe this, but I am trying to see it this way as an exercise.

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    • #47
      Re: Saving, Asset-Price Inflation, and Debt-Induced Deflation (Log in to read comments)

      It is, but asset inflation can do an awful lot to make this nominally better, can't it?

      In the UK it looked like housing peaked about 2 - 3 years ago as I recall, but housing started to appreciate again. Isn't it possible that re-inflation will begin raising wages and goods prices and houses will stop losing value?

      The $10 of borrowing could become $20 of borrowing, couldn't it?

      Is there some limit to this, really? Maybe there is but maybe we're a lot further away from it than we think.

      I don't really believe this, but I am trying to see it this way as an exercise


      I'm not going to say it will be impossible to rekindle the housing boom, but I should think it would take quite a bit more stimulus than five years ago, when housing-boom mentality was just a segue away from dot-com mania.

      Think of a weightlifter trying to pump 300 pounds above his head. If he should stall and the barbell actually starts to come down on him, it will be MUCH harder to reverse the direction than if the upward motion continued more or less smoothly.

      Also, even if we are able to heat up the housing market one more time -- I mean, really heat it up, so that cash-out re-fi's are going ganbusters once again -- where will that take us? To the point where we are even more $trillions in debt, and having to borrow $20 to create a $1's GDP growth? Consider how much borrowing it has already taken merely to generate the weakest recovery of the postwar period.

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      • #48
        checkmate

        marc faber this month published a graph titled "the diminishing impact of debt growth on the economy, 1966-2015," from data by b bannister of stifel nocolaus. it shows the growth of nominal gdp per $1 increase in total u.s. debt, which looks like a wiggly curve heading down in general. there is a trend line, and the trend line hits zero in 2015. the implication here is that by approx 2015 increasing debt will not be able to cause a rise in nominal gdp. checkmate.

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        • #49
          Re: Saving, Asset-Price Inflation, and Debt-Induced Deflation

          The utilization of commercial bank credit to finance real investment or government deficits does not constitute a utilization of savings, since bank financing is accomplished through the creation of new money.

          From the standpoint of the commercial banks, the monetary savings practices of the public are reflected in the velocity of their deposits and not in their volume. Whether the public saves or dissaves, chooses to hold their savings in the commercial banks or to transfer them to intermediary institutions will not, per se, alter the total assets or liabilities of the commercial banks nor alter the forms of these assets an liabilities.

          The means-of-payment velocity of time/savings deposits is zero and the funds are lost to investment, to consumption, and indeed to any type of payment. Such a cessation of the circuit income and transactions velocity of funds, funds which constitute a prior cost of production, cannot but have deleterious effects in our highly interdependent pecuniary economy (it created the phenomenon STAGFLATION).

          The much larger question with which we should be concerned, therefore, is the raison d'etre of an institutional arrangement whose benefits to the banks are dubious and which undoubtedly exerts deletereious effects on the financial interemdiaries and the economy.

          In the Keynesian system S = I by definition, and in the national income accounts, S=I + (G - T). However, such definitions have little to contribute to dynamic monetary analysis. An expansion of commercial bank held monetary savings deposits is prima facie evidence of a leakage which collects in the form of unspent balances.

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