Some math on how we’re going to get out of this mess

[davelj]

I’ve been traveling for the last couple of weeks so I didn’t have the chance to reply to someone’s earlier question to me in a previous thread which basically asked, “OK, what do you suggest the Powers That Be do.”

There are three objectives to the combination of plans and initiatives that the government is currently enacting/weighing:

(1) Avoid a depression (defined as a 10% peak-to-trough decline in real GDP);
(2) Keep as many people in their homes as possible;
(3) Stabilize the economy on a lower-growth trajectory that doesn’t rely on increasing debt levels (they now understand debt is a huge problem).

In order to avoid a depression the Fed and Treasury are throwing everything and the kitchen sink at the issue. I think we’ll see a coordinated global stimulus plan in 2009 involving north of $600 billion here in the US, and several $trillion overseas. Also, I think we’re going to see taxpayers (via the govt) eat a bunch of mortgage principal via Freddie and Fannie (which we now own) in order to lower the debt burden on a lot of homeowners. This will act as a de facto stimulus as well.

Now, the REAL problem is there’s too much debt out there right now. About $50 trillion or so in the US, which is about 350% of (just north of) $14 trillion in GDP (an all-time high). So, debt has to be worked down.

My rough calculations suggest that foreigners are going to eat over $1 trillion of our (bad) debt (between corporates and MBS), domestic corporate bond investors about $1.5 trillion, and domestic financial institutions another $1.5 trillion. Plain old paydowns will probably total at least another $2.5 trillion, and could be much more than that. So, now we’re down to about $43.5 trillion in debt. But the government (us, that is) is probably going to eat $2 trillion in mortgage-related losses related to Fannie and Freddie, which increases the figure back up to $45.5 trillion. Assuming GDP declines by 6%, we end up with $13.6 trillion in trough GDP. But our debt-to-GDP has also declined slightly to 335% of GDP. And at lower rates than previously. Now, 335% is still WAY too high, so I assume that the economy slows from a “normalized” rate of 3% annual growth down to 1% annually for the next decade. The 2% “output gap” will go towards paying down debt (it will largely come out of consumer spending). So we’re looking at $300 billion+ of annual debt paydowns over 10 years, which leaves us with a debt-to-GDP ratio of around 280% in a decade. This is high but manageable. Really, we probably need to be below 250%, but that’s an issue for another day.

Now, that $2 trillion in mortgage-related losses that we, the good taxpayers of the US, are going to eat will largely consist of principal reductions given to homeowners in order to lower their mortgage payments. Yes, it’s unfair. I know. But it’s going to happen, so stop whining about it. Just accept it. Life ain’t fair. Move on. Also, if it’s any consolation, it will help us avoid a depression which would be even more painful than the ultimate bill associated with bailing out these irresponsible fucksticks. The wrinkle in the principal reduction plans will be that the execution is complicated and it’s going to take longer than the our Great Leaders think. But, it will get done in some sloppy form or fashion.

The vast majority of the TARP money (ex the money that goes to the auto companies) and the various acronym-challenged “facilities” will be money good. That is, we’ll get back most of that money (forget about the interest), but we’ll probably take a hit. With a few exceptions, the collateral for this stuff is pretty good (albeit not perfect). The really big losses to the govt (us) will be through Fannie and Freddie in the residential sector.

My point here is to say that it will be ugly. Very very ugly. But the govt – via us, the taxpayers – has the capacity to put some pretty large plugs in the dike. On paper, there’s no reason we SHOULD have a depression. But, even assuming the Powers That Be are on top of things (and they appear to be slowly but surely catching on), we’re still going to see very slow growth over the next decade after this (deep, long) recession ends (sometime in 2010 is my guess). There’s too much debt to be paid down to come to any other conclusion.

I will consider it a victory if we “only” see a 6% decline in GDP and we can grow at 1% annually over the next decade. But this is quite doable if the Authorities don’t fuck it up. And I think they’re coming around, albeit with a few bumps in the road.

I’m bearish but I don’t see Armageddon on the horizon. Just a great deal of pain followed by a long period of very slow growth.

Just my 2 cents (because someone asked in a previous thread).

[4plexowner]

just for comparison, the debt level as a percentage of GDP in the late 1920’s peaked at about 260%

you are talking about getting from our current 350% down to 280% debt a decade from now

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

time will tell

~

not sure about keeping people in their houses

none of the bailout plans so far have made much difference to the housing market

what has changed in the housing market:
– must prove income to obtain mortgage
– must have down payment to obtain mortgage

those are two negative changes and the only positive change I see is that interest rates are coming down

the Option ARM mortgages that are resetting in 2009/10 will benefit from the current low interest rates

without a return of stated-income (liar’s), nothing down mortgages I see a long hard road for So Cal and other high priced real estate markets

reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO

outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath

rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value

~

what signs do you see that indicate any slowing of debt build?

I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending

if anything, debt build has to continue on an exponential path to infinity (which of course it can’t) to support the increasing burden of interest payments as well as feed new growth – this is one of the reasons why George Ure (www. urbansurvival.com) posits that fiat currencies are limited to a lifespan of about 83 years

in the 1920’s the debt build reached 260% before collapsing – we have managed 350% (is that progress?) – how high can we take this ratio? – you think the ratio is going lower over the next decade

again, time will tell

[4plexowner]

just for comparison, the debt level as a percentage of GDP in the late 1920’s peaked at about 260%

you are talking about getting from our current 350% down to 280% debt a decade from now

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

time will tell

~

not sure about keeping people in their houses

none of the bailout plans so far have made much difference to the housing market

what has changed in the housing market:
– must prove income to obtain mortgage
– must have down payment to obtain mortgage

those are two negative changes and the only positive change I see is that interest rates are coming down

the Option ARM mortgages that are resetting in 2009/10 will benefit from the current low interest rates

without a return of stated-income (liar’s), nothing down mortgages I see a long hard road for So Cal and other high priced real estate markets

reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO

outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath

rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value

~

what signs do you see that indicate any slowing of debt build?

I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending

if anything, debt build has to continue on an exponential path to infinity (which of course it can’t) to support the increasing burden of interest payments as well as feed new growth – this is one of the reasons why George Ure (www. urbansurvival.com) posits that fiat currencies are limited to a lifespan of about 83 years

in the 1920’s the debt build reached 260% before collapsing – we have managed 350% (is that progress?) – how high can we take this ratio? – you think the ratio is going lower over the next decade

again, time will tell

[4plexowner]

just for comparison, the debt level as a percentage of GDP in the late 1920’s peaked at about 260%

you are talking about getting from our current 350% down to 280% debt a decade from now

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

time will tell

~

not sure about keeping people in their houses

none of the bailout plans so far have made much difference to the housing market

what has changed in the housing market:
– must prove income to obtain mortgage
– must have down payment to obtain mortgage

those are two negative changes and the only positive change I see is that interest rates are coming down

the Option ARM mortgages that are resetting in 2009/10 will benefit from the current low interest rates

without a return of stated-income (liar’s), nothing down mortgages I see a long hard road for So Cal and other high priced real estate markets

reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO

outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath

rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value

~

what signs do you see that indicate any slowing of debt build?

I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending

if anything, debt build has to continue on an exponential path to infinity (which of course it can’t) to support the increasing burden of interest payments as well as feed new growth – this is one of the reasons why George Ure (www. urbansurvival.com) posits that fiat currencies are limited to a lifespan of about 83 years

in the 1920’s the debt build reached 260% before collapsing – we have managed 350% (is that progress?) – how high can we take this ratio? – you think the ratio is going lower over the next decade

again, time will tell

[4plexowner]

just for comparison, the debt level as a percentage of GDP in the late 1920’s peaked at about 260%

you are talking about getting from our current 350% down to 280% debt a decade from now

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

time will tell

~

not sure about keeping people in their houses

none of the bailout plans so far have made much difference to the housing market

what has changed in the housing market:
– must prove income to obtain mortgage
– must have down payment to obtain mortgage

those are two negative changes and the only positive change I see is that interest rates are coming down

the Option ARM mortgages that are resetting in 2009/10 will benefit from the current low interest rates

without a return of stated-income (liar’s), nothing down mortgages I see a long hard road for So Cal and other high priced real estate markets

reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO

outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath

rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value

~

what signs do you see that indicate any slowing of debt build?

I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending

if anything, debt build has to continue on an exponential path to infinity (which of course it can’t) to support the increasing burden of interest payments as well as feed new growth – this is one of the reasons why George Ure (www. urbansurvival.com) posits that fiat currencies are limited to a lifespan of about 83 years

in the 1920’s the debt build reached 260% before collapsing – we have managed 350% (is that progress?) – how high can we take this ratio? – you think the ratio is going lower over the next decade

again, time will tell

[4plexowner]

just for comparison, the debt level as a percentage of GDP in the late 1920’s peaked at about 260%

you are talking about getting from our current 350% down to 280% debt a decade from now

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

time will tell

~

not sure about keeping people in their houses

none of the bailout plans so far have made much difference to the housing market

what has changed in the housing market:
– must prove income to obtain mortgage
– must have down payment to obtain mortgage

those are two negative changes and the only positive change I see is that interest rates are coming down

the Option ARM mortgages that are resetting in 2009/10 will benefit from the current low interest rates

without a return of stated-income (liar’s), nothing down mortgages I see a long hard road for So Cal and other high priced real estate markets

reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO

outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath

rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value

~

what signs do you see that indicate any slowing of debt build?

I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending

if anything, debt build has to continue on an exponential path to infinity (which of course it can’t) to support the increasing burden of interest payments as well as feed new growth – this is one of the reasons why George Ure (www. urbansurvival.com) posits that fiat currencies are limited to a lifespan of about 83 years

in the 1920’s the debt build reached 260% before collapsing – we have managed 350% (is that progress?) – how high can we take this ratio? – you think the ratio is going lower over the next decade

again, time will tell

[barnaby33]

develj, I like a lot of the things you post. You seem to be able to cover the macro situation pretty well, from a perspective. However I take real umbrage with your, “get over it life ain’t fair,” attitude.

Thats the sort of attitude that starts wars. You are right insofar as inherently life ain’t fair. What I see however is that the govt has now blundered through a year of deflation without even admitting the problem. Sure they’ve talked about debt a little bit but not a single institution in our “system” of govt has performed its check or balance properly, which has allowed major fraud to accrue. The real underlying problem with this is that our economy is fundamentally dependent on that fraud for “growth.”

Restructuring our economy away from fraud is what the discovery phase we are in is beginning to do. Our govt however has done everything it could to prevent that from happening and yet you seem to feel that as a general principal TPTB are slowly getting it right? We are now at the point where the Fed is the lender of ONLY resort.

Until we have an honest discussion as a nation about living within our means, we won’t be headed in the right direction as in real economic growth and our debt to GDP will increase simply from GDP decreasing as people with real money take it out of the markets.

As the ultimate demonstration of that, the Fed is monetizing everything in sight, but banks aren’t lending. People don’t want to borrow and the Fed hasn’t found a way to induce them to do so. How could it, we are currently in deflation despite its best efforts to the contrary. As another piece of evidence, gold (which I thought would decline) has stayed expensive and t-bills have increased in price as yield has declined quite sharply. That is because lots of money is trying to bridge the divide between the deflation we are seeing now and the inflation that they are really scared is around the corner if all that printed money does get into circulation, or one of our creditors goes with the nuclear option on their side.

[barnaby33]

develj, I like a lot of the things you post. You seem to be able to cover the macro situation pretty well, from a perspective. However I take real umbrage with your, “get over it life ain’t fair,” attitude.

Thats the sort of attitude that starts wars. You are right insofar as inherently life ain’t fair. What I see however is that the govt has now blundered through a year of deflation without even admitting the problem. Sure they’ve talked about debt a little bit but not a single institution in our “system” of govt has performed its check or balance properly, which has allowed major fraud to accrue. The real underlying problem with this is that our economy is fundamentally dependent on that fraud for “growth.”

Restructuring our economy away from fraud is what the discovery phase we are in is beginning to do. Our govt however has done everything it could to prevent that from happening and yet you seem to feel that as a general principal TPTB are slowly getting it right? We are now at the point where the Fed is the lender of ONLY resort.

Until we have an honest discussion as a nation about living within our means, we won’t be headed in the right direction as in real economic growth and our debt to GDP will increase simply from GDP decreasing as people with real money take it out of the markets.

As the ultimate demonstration of that, the Fed is monetizing everything in sight, but banks aren’t lending. People don’t want to borrow and the Fed hasn’t found a way to induce them to do so. How could it, we are currently in deflation despite its best efforts to the contrary. As another piece of evidence, gold (which I thought would decline) has stayed expensive and t-bills have increased in price as yield has declined quite sharply. That is because lots of money is trying to bridge the divide between the deflation we are seeing now and the inflation that they are really scared is around the corner if all that printed money does get into circulation, or one of our creditors goes with the nuclear option on their side.

[barnaby33]

develj, I like a lot of the things you post. You seem to be able to cover the macro situation pretty well, from a perspective. However I take real umbrage with your, “get over it life ain’t fair,” attitude.

Thats the sort of attitude that starts wars. You are right insofar as inherently life ain’t fair. What I see however is that the govt has now blundered through a year of deflation without even admitting the problem. Sure they’ve talked about debt a little bit but not a single institution in our “system” of govt has performed its check or balance properly, which has allowed major fraud to accrue. The real underlying problem with this is that our economy is fundamentally dependent on that fraud for “growth.”

Restructuring our economy away from fraud is what the discovery phase we are in is beginning to do. Our govt however has done everything it could to prevent that from happening and yet you seem to feel that as a general principal TPTB are slowly getting it right? We are now at the point where the Fed is the lender of ONLY resort.

Until we have an honest discussion as a nation about living within our means, we won’t be headed in the right direction as in real economic growth and our debt to GDP will increase simply from GDP decreasing as people with real money take it out of the markets.

As the ultimate demonstration of that, the Fed is monetizing everything in sight, but banks aren’t lending. People don’t want to borrow and the Fed hasn’t found a way to induce them to do so. How could it, we are currently in deflation despite its best efforts to the contrary. As another piece of evidence, gold (which I thought would decline) has stayed expensive and t-bills have increased in price as yield has declined quite sharply. That is because lots of money is trying to bridge the divide between the deflation we are seeing now and the inflation that they are really scared is around the corner if all that printed money does get into circulation, or one of our creditors goes with the nuclear option on their side.

[barnaby33]

develj, I like a lot of the things you post. You seem to be able to cover the macro situation pretty well, from a perspective. However I take real umbrage with your, “get over it life ain’t fair,” attitude.

Thats the sort of attitude that starts wars. You are right insofar as inherently life ain’t fair. What I see however is that the govt has now blundered through a year of deflation without even admitting the problem. Sure they’ve talked about debt a little bit but not a single institution in our “system” of govt has performed its check or balance properly, which has allowed major fraud to accrue. The real underlying problem with this is that our economy is fundamentally dependent on that fraud for “growth.”

Restructuring our economy away from fraud is what the discovery phase we are in is beginning to do. Our govt however has done everything it could to prevent that from happening and yet you seem to feel that as a general principal TPTB are slowly getting it right? We are now at the point where the Fed is the lender of ONLY resort.

Until we have an honest discussion as a nation about living within our means, we won’t be headed in the right direction as in real economic growth and our debt to GDP will increase simply from GDP decreasing as people with real money take it out of the markets.

As the ultimate demonstration of that, the Fed is monetizing everything in sight, but banks aren’t lending. People don’t want to borrow and the Fed hasn’t found a way to induce them to do so. How could it, we are currently in deflation despite its best efforts to the contrary. As another piece of evidence, gold (which I thought would decline) has stayed expensive and t-bills have increased in price as yield has declined quite sharply. That is because lots of money is trying to bridge the divide between the deflation we are seeing now and the inflation that they are really scared is around the corner if all that printed money does get into circulation, or one of our creditors goes with the nuclear option on their side.

[barnaby33]

develj, I like a lot of the things you post. You seem to be able to cover the macro situation pretty well, from a perspective. However I take real umbrage with your, “get over it life ain’t fair,” attitude.

Thats the sort of attitude that starts wars. You are right insofar as inherently life ain’t fair. What I see however is that the govt has now blundered through a year of deflation without even admitting the problem. Sure they’ve talked about debt a little bit but not a single institution in our “system” of govt has performed its check or balance properly, which has allowed major fraud to accrue. The real underlying problem with this is that our economy is fundamentally dependent on that fraud for “growth.”

Restructuring our economy away from fraud is what the discovery phase we are in is beginning to do. Our govt however has done everything it could to prevent that from happening and yet you seem to feel that as a general principal TPTB are slowly getting it right? We are now at the point where the Fed is the lender of ONLY resort.

Until we have an honest discussion as a nation about living within our means, we won’t be headed in the right direction as in real economic growth and our debt to GDP will increase simply from GDP decreasing as people with real money take it out of the markets.

As the ultimate demonstration of that, the Fed is monetizing everything in sight, but banks aren’t lending. People don’t want to borrow and the Fed hasn’t found a way to induce them to do so. How could it, we are currently in deflation despite its best efforts to the contrary. As another piece of evidence, gold (which I thought would decline) has stayed expensive and t-bills have increased in price as yield has declined quite sharply. That is because lots of money is trying to bridge the divide between the deflation we are seeing now and the inflation that they are really scared is around the corner if all that printed money does get into circulation, or one of our creditors goes with the nuclear option on their side.

[davelj]

barnaby, I don’t disagree with anything you’re saying but… I’m a pragmatist, not an idealist. My tax share of this bailout will be huge. But I’d rather pay my share than see the country go into a depression. And I suspect the govt will force it down our collective throats. So rather than get miffed about it, I find it more constructive to just accept it and plan accordingly. I would be more upset (and prone to “action”) if I thought our officials were evil and that all of these measures were going to be permanent, but I don’t believe that. They’re just bumblers who very slowly come around to reasonable answers. The irony is that as each month passes and the economy and credit markets get worse (or don’t improve in the latter case), I think the Officialdom has a better understanding of the problems and how to combat them. Again, it will be ugly and full of trial and error, but we’ll trudge through this thing.

[davelj]

barnaby, I don’t disagree with anything you’re saying but… I’m a pragmatist, not an idealist. My tax share of this bailout will be huge. But I’d rather pay my share than see the country go into a depression. And I suspect the govt will force it down our collective throats. So rather than get miffed about it, I find it more constructive to just accept it and plan accordingly. I would be more upset (and prone to “action”) if I thought our officials were evil and that all of these measures were going to be permanent, but I don’t believe that. They’re just bumblers who very slowly come around to reasonable answers. The irony is that as each month passes and the economy and credit markets get worse (or don’t improve in the latter case), I think the Officialdom has a better understanding of the problems and how to combat them. Again, it will be ugly and full of trial and error, but we’ll trudge through this thing.

[davelj]

barnaby, I don’t disagree with anything you’re saying but… I’m a pragmatist, not an idealist. My tax share of this bailout will be huge. But I’d rather pay my share than see the country go into a depression. And I suspect the govt will force it down our collective throats. So rather than get miffed about it, I find it more constructive to just accept it and plan accordingly. I would be more upset (and prone to “action”) if I thought our officials were evil and that all of these measures were going to be permanent, but I don’t believe that. They’re just bumblers who very slowly come around to reasonable answers. The irony is that as each month passes and the economy and credit markets get worse (or don’t improve in the latter case), I think the Officialdom has a better understanding of the problems and how to combat them. Again, it will be ugly and full of trial and error, but we’ll trudge through this thing.

[davelj]

barnaby, I don’t disagree with anything you’re saying but… I’m a pragmatist, not an idealist. My tax share of this bailout will be huge. But I’d rather pay my share than see the country go into a depression. And I suspect the govt will force it down our collective throats. So rather than get miffed about it, I find it more constructive to just accept it and plan accordingly. I would be more upset (and prone to “action”) if I thought our officials were evil and that all of these measures were going to be permanent, but I don’t believe that. They’re just bumblers who very slowly come around to reasonable answers. The irony is that as each month passes and the economy and credit markets get worse (or don’t improve in the latter case), I think the Officialdom has a better understanding of the problems and how to combat them. Again, it will be ugly and full of trial and error, but we’ll trudge through this thing.

[Author]

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