100% debt to GDP ratio breached!

[charliebrown]

According to www.usdebtclock.org, today the gross debt to GDP ratio just topped 100%

I guess the next stop for the debt train is 120%. This was the peak of the ratio just after WWII. If the current rate of debt increase keeps up, we have about 2.5 years to get there?

Think we will make it? Or will the debt clock stop by then?

[jpetr48]

Re: 100% debt to GDP ratio breached!

I agree with EJ's forecast that we will see austerity after 2012 elections. Consequently, debt clock will stop by then. The charade super committee is essentially presenting an easy lay-up for the next administration.

[oddlots]

Re: 100% debt to GDP ratio breached!

I'm gonna go with the exorbitant privilege and say you are gonna blow through 120% with impunity... The bond vigilantes are only 20 years overdue no?

No real sarcasm intended: just don't know what makes sense anymore.

[Techdread]

Re: 100% debt to GDP ratio breached!

I agree with EJ's forecast that we will see austerity after 2012 elections. Consequently, debt clock will stop by then. The charade super committee is essentially presenting an easy lay-up for the next administration.

If the europeans are any guide, austerity will just crash the economy & make the deficits hence debts worse.

[unlucky]

Re: 100% debt to GDP ratio breached!

If the europeans are any guide, austerity will just crash the economy & make the deficits hence debts worse.

The US will probably follow a similar trajectory to the UK, with austerity resulting in a nasty slump as the economy struggles to adapt to a new reality of less borrowing. And the Fed will go on QEasing just like the BOE.

A possible wild card is the continuing strength of US innovation. I am truly impressed by the whole hydro-fracking thing they have got going. Is US entrepreneurial spirit strong enough to crawl out from under the massive debt burden that banksters have dumped on top of it? Probably not, since if it was the banksters would be right back with another huge pile of debt to load up.

[jpetr48]

Re: 100% debt to GDP ratio breached!

The US will probably follow a similar trajectory to the UK, with austerity resulting in a nasty slump as the economy struggles to adapt to a new reality of less borrowing. And the Fed will go on QEasing just like the BOE.

+1

Can you imagine if students had to pay cash for a college education or health care procedures needed to be funded with cash over credit? I think EJ noted inflation in these areas as he did in autos. We will not only see a reset to a new reality but also a resetting of costs to what the higher education & health care markets can bear- very much as we are seeing in housing today.

[sunskyfan]

Re: 100% debt to GDP ratio breached!

I agree. "Insurance" is the cancer eating the system. Cash (and not borrowed cash) for services and property seams the logical path that this takes. The entire economy is based on "insuring" against or for some outcome whether it is retirement, education, healthcare, derivatives, hedge funds you name it. That model is fatally flawed.

[Scot]

Re: 100% debt to GDP ratio breached!

If the europeans are any guide, austerity will just crash the economy & make the deficits hence debts worse.

If taking on increasingly more debt to fund programs is the only thing preventing a drop in economy activity, then I'd say the economy crashed long ago. Taking on more debt would just hide the truth for a little longer.

[gwynedd1]

Re: 100% debt to GDP ratio breached!

Well if they ran deficits to fund liquidity in the goods and services economy with QE ,it would be faux debt held by the central bank. Not running deficits is doomsday. There is no commercially available credit to service the debt of the private sector.

They want a depression. Why is anyone's guess from a benevolent plan to switch our power generation structure to a plan of culling the human population with starvation genocide. However its pretty apparent they want a depression.

[unlucky]

Re: 100% debt to GDP ratio breached!

Well if they ran deficits to fund liquidity in the goods and services economy with QE ,it would be faux debt held by the central bank. Not running deficits is doomsday. There is no commercially available credit to service the debt of the private sector.

They want a depression. Why is anyone's guess from a benevolent plan to switch our power generation structure to a plan of culling the human population with starvation genocide. However its pretty apparent they want a depression.

"They" created an economy that was dependent on wildly excessive borrowing, by both the public and private sectors. When the private sector finally ran out of road, the public sector had to ramp up its borrowing to even greater heights to prevent a depression. That has got alarm bells ringing among those from the monetarist "right" who believe that public borrowing is bad and private borrowing is good. (I use inverted commas advisedly).

In reality we are beyond the point of being able to finesse the difference. The debate about "stimulus" versus "austerity" is a false debate that focuses on the wrong questions.

[charliebrown]

Re: 100% debt to GDP ratio breached!

I think you have a point, the line is getting more blurred. As gvt moves into larger and larger portions of our lives, its borrowing and spending has moved into areas that would have been covered by private borrowing in the past.

Has private credit dried up? The corporate bond market is at record low rates, and I see new issues all the time. However I have heard that small businesses that do not have acces to the bond markets are having a hard time getting bank loans and that individuals are not getting as many loans either.

I assume that private borrowing is better than public borrowing. Not in all cases. The government can run programs where high risk, a long term to payout or a failure to cooperate would never allow the private sector to develop some projects. But the leaders of our day don't seem to be thinking like that. All spending is the same. Spending that gets them re-elected is best, regardless of the self liquidating nature of the debt.

If the private sector wants to borrow too much for the wrong projects, at least they don't have access to my wallet.
I guess if the ENTIRE private sector borrows too much as they have were all in it together.

Regarding stimulus vs austerity. We only have so much capital stock left, and from my vantage point at 0 ft above ground, it is dwindling. Stimulus is OK, we need to do it wisely. With our current crop of leaders, I can't see it happening. Nero fiddles while Rome burns. It is going to take a crisis to get the sea change we need. Hopefully the right people get control of the reins and not the wrong ones.

[unlucky]

Re: 100% debt to GDP ratio breached!

I think you have a point, the line is getting more blurred. As gvt moves into larger and larger portions of our lives, its borrowing and spending has moved into areas that would have been covered by private borrowing in the past.

Has private credit dried up? The corporate bond market is at record low rates, and I see new issues all the time. However I have heard that small businesses that do not have acces to the bond markets are having a hard time getting bank loans and that individuals are not getting as many loans either.

I assume that private borrowing is better than public borrowing. Not in all cases. The government can run programs where high risk, a long term to payout or a failure to cooperate would never allow the private sector to develop some projects. But the leaders of our day don't seem to be thinking like that. All spending is the same. Spending that gets them re-elected is best, regardless of the self liquidating nature of the debt.

If the private sector wants to borrow too much for the wrong projects, at least they don't have access to my wallet.
I guess if the ENTIRE private sector borrows too much as they have were all in it together.

Regarding stimulus vs austerity. We only have so much capital stock left, and from my vantage point at 0 ft above ground, it is dwindling. Stimulus is OK, we need to do it wisely. With our current crop of leaders, I can't see it happening. Nero fiddles while Rome burns. It is going to take a crisis to get the sea change we need. Hopefully the right people get control of the reins and not the wrong ones.

I'd certainly agree that private borrowing is normally preferable to public, but unfortunately the household sector has hosed itself with non-productive, non self-liquidating debt. Having the government do the same thing is of course the worst "solution" imaginable. But I suspect that many politicians complaining about public borrowing are simply latching onto something that looks like a familiar villain in a confusing landscape. They are following the monetarist playbook - reduce public borrowing and fix all other problems via monetary policy.

In the UK, the BOE recently published a report on the effectiveness of QE that provides some insight on conditions for private credit. The FT had an opinion piece on it today (link below but it's behind a paywall). The FT authors' conclusion is that QE had a small effect on corporate bonds and negligible effect on bank lending. Over-indebted households and firms don't want to borrow, while banks that are still stuffed with bad assets don't want to lend. (The original BOE report doesn't put things quite so negatively). Meanwhile the government (borrower of last resort) is rapidly heading for exhaustion.

From what I hear, conditions in the US may be better but not by much. These are problems that politicians don't talk about much, except for the idea of getting banks to lend by giving them free money. Maybe they're too scary.

Urgently needed: a plan C to save Britain’s economy

[oddlots]

Re: 100% debt to GDP ratio breached!

As far as I can tell CB it's private borrowing - i.e. the banks and shadow banking sector - that, perversely, have created the mill-stone around our neck. Just to take the easy example, Ireland's debt to GDP on public accounts was actually very healthy before the government there somehow decided that it was responsible for making good on all the the loans that Anglo Irish and the other banks made. At this point I can no longer tell what's private and public. It's kind of a perverse world where we arrived at Hayek's socialist dystopia where no-one can make rational decisions - if there's no market there's no information on which to base such decisions on - via an apparent devotion to market principles (i.e., financial market de-regulation.)

Weird times.