Minyanville on Debt
February 21, 2008
– Comments (9)
Debt is the main reason for my negative view of the market. Historically I have not found a single example of an economy where excessive debt played out well. Either economies cut back when they could make choices about how to cut back, or they were forced to cut back and had little control of who and what got slaughtered.
The US is the biggest economy in the world and that debt is no longer owed mostly to itself, but is spread out throughout the world. Currently the GDP of the US is about $13.1 trillion and and all debt, government and personal debt, is estimated to be 342% of GDP. That's a whopping $44.8 trillion, or, with a population of 302 million, $148k for every man, woman and child. Calculate that debt only over the workforce and it is close to double that per actual producing worker... And the median income is what? I think roughly 1/3rd of the debt per person, and 1/6th per worker. And this is spread throughout the world. It can not end well.
So, looking on Minyanville yesterday a short piece titled "Is US Next Japan," where the debate rages between whether there will be hyper-inflation or deflation, is a range of opinions on debt:
Mr. Practical:
The parallels are debt and huge amounts cross-collateralized through derivatives. The U.S. in this comparison is much worse off than Japan was.
The difference is creativity and cajoling by the government.
The result will be the same, just manifested differently.
Professor Scott Reamer:
Policy responses - fiscal, monetary as well as legislative on both the federal and state level - are not mitigating factors themselves, as Japan's experience and the U.S.'s during the 1930-1934 period suggests.
The only variable is whether the magnitude of the debt boom preceding the current bust was smaller or larger than the one in Japan during the 1980s and the one in the U.S. during the great depression. By all measures I have seen and analyzed, the current bubble is bigger than both in absolute and relative (to GDP) dollars.
Professor Stephanie Pomboy:
I think a critical point to make - aside from the magnitude of leverage - is that what's 'different' in this cycle is the degree to which that leverage has been created outside the banking system over which the Fed (and other central banks) exert control.
This makes pulling the traditional levers less useful in preventing deflation 'this time.' Even the nontraditional measures (TAF, expanded collateral accepted at the Discount Window, etc.) are less useful in that they focus on the banks, which accounted for a meager 19% of credit creation over the last year.
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