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Why the US credit machine is running amok
August 14, 2006 (MoneyWeek)
The Anglo-Saxon countries have been the high-growth economies among the industrialized economies. By definition, strong economic growth implies that domestic investment exceeds domestic saving. Actually, Mr Bernanke and others have repeatedly justified the capital inflows with the fact that capital investment exceeds domestic saving.
On the surface, this is true. But this description represents a grotesque distortion of the economic reality. What has truly happened in the United States and the other English-speaking countries is that private households, in response to inflating house prices, have slashed their savings even faster than businesses slashed their capital investments. As a result, minimal investment exceeds nonexistent domestic saving. This explains their stronger economic growth.
Now to the US economy. With zero savings and runaway credit expansion, the United States ought to have sky-high interest rates. Thanks to large bond purchases by the Asian central banks and the virtually limitless availability of carry trade in dollars and yen, implemented by the two central banks, US long-term interest rates have held at absurdly low levels. On the surface, interest rates are determined in the markets. In these two countries, they are heavily manipulated by the central banks.
Barely noticed, the US credit machine ran amok again in the first quarter of 2006, revealing the Fed's tightening as a farce. Nonfinancial credit expanded $2,914.0 billion, annualized, up from the prior quarter's $2,434 billion. Together with an increase in financial credit by $1,479.2 billion, the total adds up to $4,392.8 billion.
Compared with an increase by $827 billion in 2000, credit and debt growth has quadrupled. Total outstanding indebtedness rose to $41.8 trillion, equal to 334% of nominal GDP and 376% of real GDP. In the first quarter, $4.30 of additional debt was added for each dollar added to nominal GDP growth and $7.50 additional debt for each dollar added to real GDP growth. Until the late 1970s, this credit-to-GDP ratio had held at a steady rate of 1:1.4 for over 30 years.
AntiSpin: After years of covering the faux US "economic expansion," running as it has more on credit expansion than on any other factor, this story calls attention to facts that were obvious to us, and other web sites, going back to 1998. The news in this story is that in Q1 2006, $7.50 of additional debt was added to the US economy for each dollar added to real GDP growth, despite the Fed's 16 rate hikes. And in spite of this continued runaway credit expansion and attendant rising all-goods and asset inflation, the Fed last week decided to take a "pause" from its inutile rate hikes. This story also covers the phenomenon of The Three Desperados that was apparent as early as March of last year. The Coming End of the US Foreign Investment Bubble explains why the bubble in foreign US investment generally might end and the implications for the dollar and US interest rates.
Some day the mainstream US press will cover the story. Right about that time we'll start to see a quarterly debt-to-GDP growth ratio reported by the Fed, but we're not holding our collective breath.
August 14, 2006 (MoneyWeek)
The Anglo-Saxon countries have been the high-growth economies among the industrialized economies. By definition, strong economic growth implies that domestic investment exceeds domestic saving. Actually, Mr Bernanke and others have repeatedly justified the capital inflows with the fact that capital investment exceeds domestic saving.
On the surface, this is true. But this description represents a grotesque distortion of the economic reality. What has truly happened in the United States and the other English-speaking countries is that private households, in response to inflating house prices, have slashed their savings even faster than businesses slashed their capital investments. As a result, minimal investment exceeds nonexistent domestic saving. This explains their stronger economic growth.
Now to the US economy. With zero savings and runaway credit expansion, the United States ought to have sky-high interest rates. Thanks to large bond purchases by the Asian central banks and the virtually limitless availability of carry trade in dollars and yen, implemented by the two central banks, US long-term interest rates have held at absurdly low levels. On the surface, interest rates are determined in the markets. In these two countries, they are heavily manipulated by the central banks.
Barely noticed, the US credit machine ran amok again in the first quarter of 2006, revealing the Fed's tightening as a farce. Nonfinancial credit expanded $2,914.0 billion, annualized, up from the prior quarter's $2,434 billion. Together with an increase in financial credit by $1,479.2 billion, the total adds up to $4,392.8 billion.
Compared with an increase by $827 billion in 2000, credit and debt growth has quadrupled. Total outstanding indebtedness rose to $41.8 trillion, equal to 334% of nominal GDP and 376% of real GDP. In the first quarter, $4.30 of additional debt was added for each dollar added to nominal GDP growth and $7.50 additional debt for each dollar added to real GDP growth. Until the late 1970s, this credit-to-GDP ratio had held at a steady rate of 1:1.4 for over 30 years.
AntiSpin: After years of covering the faux US "economic expansion," running as it has more on credit expansion than on any other factor, this story calls attention to facts that were obvious to us, and other web sites, going back to 1998. The news in this story is that in Q1 2006, $7.50 of additional debt was added to the US economy for each dollar added to real GDP growth, despite the Fed's 16 rate hikes. And in spite of this continued runaway credit expansion and attendant rising all-goods and asset inflation, the Fed last week decided to take a "pause" from its inutile rate hikes. This story also covers the phenomenon of The Three Desperados that was apparent as early as March of last year. The Coming End of the US Foreign Investment Bubble explains why the bubble in foreign US investment generally might end and the implications for the dollar and US interest rates.
Some day the mainstream US press will cover the story. Right about that time we'll start to see a quarterly debt-to-GDP growth ratio reported by the Fed, but we're not holding our collective breath.
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