Genius of the day: Krugman
Yes, our village fool has inadvertently hit it on the head this time. The proposed debt Ponzi scheme keeps running as long as the people haven't caught up to what's happening and try to behave as if we had a normal economy. Once everybody realizes it, everybody takes as much debt as he can, asset prices get bid up to the point where getting a return on your investment becomes all but impossible, and then the sweet dream comes to an end, and enrichment through debt no longer works. "Hey, how do I pay off that $100,000 margin debt to my brokerage?" - "You don't pay it off. You outgrow it by borrowing another $120,000 and investing it and growing your equity faster than the debt. What did you say? You're asking, "but, uncle, how can I be sure my equity will grow when the PE ratio of the index is already above 40?" Oh, well...a good question...And I don't know the answer to that one...I guess, our little game is up. Damn financial literacy...If every Joe and their cousin did not try to copycat our margin trading strategy, we could stay in this game forever..."
"Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.
From 1929 to 1933, everyone was trying to pay down debt — and the debt/GDP ratio skyrocketed thanks to contraction and deflation. During and immediately after WWII, there was massive borrowing — but GDP grew faster than debt, and the debt burden ended up falling.
Yes, it seems paradoxical — but that’s the kind of world we’re living in. And the refusal of so many people to face up to the fact that we’re in a world where conventional rules don’t apply makes it likely that we’ll stay in that world for a long time come."