New Debt to GDP ratio ...ouch

[Jeff]

Re: New Debt to GDP ratio ...ouch

The classic Samuelson textbooks for Econ 101 and 301 back in the 70's gave me the basic foundation of non-Austrian stuff that had me retired at 36. I still think the entry Micro and Macroeconomic stuff in here is something every educated or at least literate person should read.

[ljaycox]

Re: New Debt to GDP ratio ...ouch

Earlier in the thread someone pointed out that Galbraith postulated that one could not measure the quantity and velocity of maney at the same time. This reminded me of the uncertainty principle, which Galbraith would have been very familair with since it was quite novel and shocking a the time. I have not a fraction of the econromic understanding to required to comment on the truth of the proposition, but i found it interesting to see it asserted by a respected economist.

Care to flesh this idea out a little?

I don't think there's an analogy to be made between money & wavicles.

You can measure money's velocity & position at the same time.

Even if you couldn't[*], that wouldn't change the nature of reality. nanomoney won't go through 2 slits at the same time.



Just throwing some ideas out - since I don't know what you mean I'm taking wild stabs at it. I hope you don't pull a "the Secret" out on us. [*] I lied - you can't. Since no 2 people define money identically you can't measure anything about money anyway.

[ASH]

Re: New Debt to GDP ratio ...ouch

ASH, try this before you read anything about quantitative modelling in economics and finance. It's not macro but very interesting philosophically. If I recall correctly, you have the appropriate background to get into the detail.

Taleb's books are also a good place to start on this particular topic.

Ash:

I am reading "Debt And Delusion" by Peter Warburton right now ... and I am finding it fascinating. It is geared to the "intelligent layman."

I would recommend "More Heat then Light" as a companion to any modern (neoclassical) text.

Thank you, all, for the reading list.

[Spartacus]

Re: New Debt to GDP ratio ...ouch

Care to flesh this idea out a little?

I don't think there's an analogy to be made between money & wavicles.

You can measure money's velocity & position at the same time.

Even if you couldn't[*], that wouldn't change the nature of reality. nanomoney won't go through 2 slits at the same time.

And I also notice that it seems the "Curse of Heisenberg" is layed upon money as heavily as sub-atomic particles.

Just throwing some ideas out - since I don't know what you mean I'm taking wild stabs at it. I hope you don't pull a "the Secret" out on us.
[*] I lied - you can't. Since no 2 people define money identically you can't measure anything about money anyway.

[sunskyfan]

Re: New Debt to GDP ratio ...ouch

Because I only need to understand one woman, and by marrying an objective and rational spouse, I've pretty much got that one figured out.


Wow. Talk about an idealist confusing future earnings with past performance. I seem to remember as "irrational excuberance" comment from the past that became "my world view was flawed" comment.

[cbr]

Re: New Debt to GDP ratio ...ouch

If it's necessary to return to the mean, how do we get there?

"1 Pay the debts down:
It's obvious that GDP will be dropping for awhile, and Government is going to be increasing debt. Even if the public could dedicate 10% more of it's disposable income to paying down debt, without taking on new debt, we're probably looking at about 20 years before getting back to the mean. Of course some debt held by people loosing their jobs would have to be covered by the paying public, defaults passed on to them, or by the government. Dedicating 10% of income for additional debt payment would have a negative effect on GDP causing higher unemployment ..."

I AGREE THIS IS NOT THE WAY THAT WILL BE CHOSEN

"2 Default:
Economic nuclear option.

And the winner is-----Inflation!

The question is, is this just a scary looking graph or do we really have to go back to the mean?"

LET'S ASK THE QUESTION ANOTHER WAY:


The question of whether we really have to revert to the mean is largely tied up in manner #2. Default.


What are the REAL ramifications of default: short term, long term.

As I understand it, there are several tranches to a default:

1) FIRE derivatives vaporization of derivatives liabilities: other than by destroying some institutions that grease the skids of the real economy, this would simply destroy paper wealth of FIRE insiders, with only a marginal trickle down effect on the real economy.

2) Foreign held US debt: well, we do carry the biggest stick. Emerging Nations default on debts: national defaults only impact the debtor to the extent that the lender can do something about it.

Long term, this would be remembered, and the rest of the world act accordingly, but truly, especially short term, what would happen if the US simply said (to either a targeted group of foreign lenders or all of them): 'sorry sucker' ?


3) Debt held by US entities: well, again, the only thing they can do is vote with their feet long term, and wallets on future investment decisions (all within the legal framework dictated by the government anyway).

So, I think the key to understanding ANY human action is understanding the ultimate leverage first (being physical/military domination)

***ALL human decisions are a calculation based upon a chain of influence - but ultimately backed at the top by the predicted outcome of physical force. ***

The US has by far the greatest ability to exert physical force of any nation or any currently conceiveable league of nations.


So what would a US default actually look like?

[ljaycox]

Re: New Debt to GDP ratio ...ouch

Ash:

I am reading "Debt And Delusion" by Peter Warburton right now--it was very difficult to find (the local world class university had the only copy in my area and would not lend it even to my librarian wife) and was quite expensive (for a book) to buy, but it was re-released in 2005 and I am finding it fascinating. It is geared to the "intelligent layman."


"Can you recommend a non-Austrian textbook that covers the mechanics of debt, credit, and money? My encounters with economics have largely been on the internet, and consequently, I don't think my "knowledge" of such matters is either particularly systematic or diverse. I thought Galbraith's Money -- Whence It Came, Where It Went was edifying, and an entertaining read, but I feel ready for something more meaty. That's partly why I'm asking about textbooks rather than popularizations. If nothing else, I figure I'd better understand what the mainstream thinks is going on, before I expend too much effort denouncing it."

And I also notice that it seems the "Curse of Heisenberg" is layed upon money as heavily as sub-atomic particles.

[ljaycox]

Re: New Debt to GDP ratio ...ouch

I am reading "Debt And Delusion" by Peter Warburton right now--it was very difficult to find (the local world class university had the only copy in my area and would not lend it even to my librarian wife) and was quite expensive (for a book) to buy, but it was re-released in 2005 and I am finding it fascinating. It is geared to the "intelligent layman."


"Can you recommend a non-Austrian textbook that covers the mechanics of debt, credit, and money? My encounters with economics have largely been on the internet, and consequently, I don't think my "knowledge" of such matters is either particularly systematic or diverse. I thought Galbraith's Money -- Whence It Came, Where It Went was edifying, and an entertaining read, but I feel ready for something more meaty. That's partly why I'm asking about textbooks rather than popularizations. If nothing else, I figure I'd better understand what the mainstream thinks is going on, before I expend too much effort denouncing it."

[BadJuju]

Re: New Debt to GDP ratio ...ouch

The only way out of this mess is to build a REAL economy based on manufacturing and selling goods. Pumping money into a dying economy will only prolong the inevitable.Lowering corporate taxes and allowing write offs for business expansion would be a start.20% of something is better than 35% of nothing.

Even then, consumption levels are still going to have to go down dramatically. The American lifestyle is simply not sustainable in a world with limited resources.

[Roughneck]

Re: New Debt to GDP ratio ...ouch

The only way out of this mess is to build a REAL economy based on manufacturing and selling goods. Pumping money into a dying economy will only prolong the inevitable.Lowering corporate taxes and allowing write offs for business expansion would be a start.20% of something is better than 35% of nothing.

[mcgurme]

Re: New Debt to GDP ratio ...ouch

ASH, try this before you read anything about quantitative modelling in economics and finance. It's not macro but very interesting philosophically. If I recall correctly, you have the appropriate background to get into the detail.

Taleb's books are also a good place to start on this particular topic.

The paper is a nice quantitative description, thanks for posting.

[we_are_toast]

Re: New Debt to GDP ratio ...ouch

Interesting article Rajiv. Here is the rest of it:

A point I made in the Crash Course chapter on debt, which was that assets are variable but debts are fixed, can be broadened to include the claim that incomes are variable but debts are fixed.

That same spike in debt-to-GDP that weighed down the US during the Great Depression is now set to vault to some new stratospheric record of possibly 500% or 600% or more.

And the choices for reversing this ratio to a manageable level, notwithstanding Paulson’s confusing alphabet soup array of government bailout programs, are quite limited.

1. Pay the debts down
2. Default on them
3. Inflate them away

That’s it. Those are all the options. All you have to do is decide which is the most likely outcome, and position your life and investments accordingly.

If it's necessary to return to the mean, how do we get there?

1 Pay the debts down:
It's obvious that GDP will be dropping for awhile, and Government is going to be increasing debt. Even if the public could dedicate 10% more of it's disposable income to paying down debt, without taking on new debt, we're probably looking at about 20 years before getting back to the mean. Of course some debt held by people loosing their jobs would have to be covered by the paying public, defaults passed on to them, or by the government. Dedicating 10% of income for additional debt payment would have a negative effect on GDP causing higher unemployment ...

2 Default:
Economic nuclear option.

And the winner is-----Inflation!

The question is, is this just a scary looking graph or do we really have to go back to the mean?

[Rajiv]

Re: New Debt to GDP ratio ...ouch

Chris Martenson has a good take on this today

The crisis explained in one chart: Debt-to-GDP

If I was ever given just one chart, just one piece of data, to make the case that we were on an unsustainable path that had a date with a long period of contraction and economic hardship, it would be this one.


Figure 1: This chart compares total debt (or “credit”) in the U.S. to GDP (or Gross Domestic Product) on a percentage basis. Current total credit-market debt stands at more than 340 percent of total GDP.

As we can see on this chart, the last time debts got even remotely close to current levels was back in the early 1930s, and that bears a bit of explanation. The debt-to-GDP ratio back then didn’t start to climb until after 1929 (blue arrow), because debts remained relatively fixed in size, while it was the GDP that fell away from under the debts. With the exception of the Great Depression anomaly, our country always held less than 200 percent of our GDP in debt (green circle). In 1985 we violated that barrier and have never looked back.

What does this chart tell me? It says that what each of us knows to be “just how the economy works” is really a historically unusual experiment with debt that is barely 25 years old. In the sweep of economic history, this barely qualifies as a blink.

It says, if you listen carefully enough, that all of our global economic growth has been fictitious. An illusion of debt.

Consider that debt had most recently been growing at a rate six times faster than the underlying GDP and you’ll begin to appreciate just how bogus the recent “growth” really was.

Here's an example. Consider two families living side by side. Each is earning $50,000/year. At our first “GDP snapshot” of these two families, we find that each has a GDP of $50k. But the next year one of the families goes out and buys an additional $50k of goods and services for itself, using a combination of auto loans, credit cards, student loans, and a home equity line of credit (HELOC).

At our second “GDP snapshot” one family is still mired in a $50k GDP but the other has undergone an exciting 100% growth in their economy and is now sporting a GDP of $100k.

But the underlying reality is that each family still has $50k of earning power. The measurement itself introduced a fallacy by neglecting to factor out the use of credit when measuring “growth.” That is exactly analogous to the US GDP situation and explains why the US, and much of the world, is now in for a very painful adjustment process.

Debt-to-GDP for family #2 assures that they will be living under the strain of paying down those loans for years to come. Time spent living beyond one’s means necessitates a future period of living below one’s means.
And this is why “unlocking the credit markets” is pure fiction.

Nothing needs to be unlocked. What we need is to recognize the vast damage that we did to ourselves as we elevated and then clung to a set of falsehoods.

The interesting part, as is always true of every bubble, is looking back and wondering how it is that we ever believed these falsehoods.

• It never made sense that one country could consume wildly beyond its production forever.
• One cannot borrow and consume one’s way to greater prosperity.
• It is not possible for an economy to be 80% service based, at least not sustainably.

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(contd)

[*T*]

Re: New Debt to GDP ratio ...ouch

ASH, esp. given your academic background, I would recommend "More Heat then Light" as a companion to any modern (neoclassical) text.

[Chris]

Re: New Debt to GDP ratio ...ouch

ASH, try this before you read anything about quantitative modelling in economics and finance. It's not macro but very interesting philosophically. If I recall correctly, you have the appropriate background to get into the detail.