Debt saturation

[Arraya]

This is kind of a damned if you do damned if you don’t situation. Slowing debt creation would cause a massive contraction of money supply because of lack of “new” money in the system to service debt. Practically all money is debt. The kicker is that there is never enough money in existence to pay off existing interest so it must continuously keep creating more debt/ money. It is a grow or die system.

Now we’ve come to an interesting point where piling more debt on is also destructive,as indicated in the article, but is a slower “crash” because they are still pumping money into the system. The problem is job creation has stopped and wages are deflating(albeit minimal). Which means, no more new debt slaves and less ability to service debts amongst the working. So the only thing the can do to stop massive deflation is pile on more and more government debt and various forms of “Printing” to feed the monetary system. I can’t imagine they can keep this up for too much longer. Eventually, we have to have a monetary system crash of some flavor.

This is an “irreconcilable contradiction” of the monetary system.

[davelj]

This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.

We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…

There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.

First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).

Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.

Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.

[davelj]

This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.

We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…

There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.

First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).

Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.

Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.

[davelj]

This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.

We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…

There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.

First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).

Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.

Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.

[davelj]

This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.

We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…

There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.

First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).

Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.

Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.

[davelj]

This notion of incremental debt engendering a smaller and smaller amount of incremental GDP growth has been around for over a decade.

We have a debt problem. That’s clear. And it’s going to be a significant drag on GDP going forward for many years. However…

There are some subtle issues – I don’t want to use the word “problems” – with the analysis presented in the article.

First, you have to distinguish between causation and correlation. Did increasing debt CAUSE GDP to grow over the last few decades or did GDP grow IN SPITE OF the increasing debt load? My belief is that the growth in debt DID contribute to GDP growth – but to what extent is impossible to measure. Part of the relationship is certainly correlation. For example, there are plenty of examples throughout history (both from the US and other countries) where debt has declined dramatically (from very high levels) and GDP has grown strongly over the period in question. So, my point is that I think we can safely say that (1) We have way too much debt, and (2) Paying down that debt will be a drag on GDP for some time to come. What we cannot say with any certainty is that deleveraging will bring on another deep recession or a depression (although anything’s possible).

Second, deleveraging is going to come from several sources: (1) defaults (charge offs), (2) quantitative easing (money printing – another form of default, you could argue), (3) businesses and households substituting debt with equity, and (4) retained earnings. We are seeing ALL of these happening every day.

Again, the debt load is a big problem. (And the main graph in the article does tell an important story.) But it isn’t necessarily a problem that leads to us all living in cardboard boxes in a few years.

[davelj]

Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**

Equity = $37.5 trillion

[2010 GDP will be roughly $14.5 trillion)

* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).

[davelj]

Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**

Equity = $37.5 trillion

[2010 GDP will be roughly $14.5 trillion)

* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).

[davelj]

Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**

Equity = $37.5 trillion

[2010 GDP will be roughly $14.5 trillion)

* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).

[davelj]

Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**

Equity = $37.5 trillion

[2010 GDP will be roughly $14.5 trillion)

* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).

[davelj]

Another way to think about the US debt problem is looking at it from a balance sheet perspective (using 4Q09 numbers):

Liabilities = $14.6 trillion in Federal Debt*
$ 2.3 trillion in State and Local Debt
$18.1 trillion in Private Debt**

Equity = $37.5 trillion

[2010 GDP will be roughly $14.5 trillion)

* Excludes Social Security and Medicare because we have total control over how they get financed. That is, we can choose to cut benefits or increase taxes if we want to.
** This is NET private debt, which excludes the double-counting of certain financial debt that we see in the oft-seen chart that puts gross US debt at 350% of GDP (actually, total debt is closer to 250% of GDP)

So, what we have is an entity with a debt-to-equity ratio of about 1 to 1. Not ideal, mind you. But not about to keel over, either. For perspective, recall that most LBOs take on debt-to-equity ratios of 3 or 4 to 1. The average debt-to-equity ratio for companies in the US is .5 to 1; that is, there is twice as much equity as debt. So, the US is leveraged more than a truly healthy company should be, but well below the levels of a company that’s just gone through an LBO. So, if I’m a Director of US, Inc., I’m definitely concerned. But I’m not about to jump out of the window. Also, I remember that US, Inc. can print money if it wants to (at a cost, of course!).

[DWCAP]

Dave, please dont forget that ‘USA.inc’ is not running a profit and doesnt have a good foreseeable way of turning one either. I dont know if the average US company or a LBO is a good comparison. I am thinking more like 1999 internet/tech company.

[DWCAP]

Dave, please dont forget that ‘USA.inc’ is not running a profit and doesnt have a good foreseeable way of turning one either. I dont know if the average US company or a LBO is a good comparison. I am thinking more like 1999 internet/tech company.

[DWCAP]

Dave, please dont forget that ‘USA.inc’ is not running a profit and doesnt have a good foreseeable way of turning one either. I dont know if the average US company or a LBO is a good comparison. I am thinking more like 1999 internet/tech company.

[DWCAP]

Dave, please dont forget that ‘USA.inc’ is not running a profit and doesnt have a good foreseeable way of turning one either. I dont know if the average US company or a LBO is a good comparison. I am thinking more like 1999 internet/tech company.

[Author]

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