New Debt to GDP ratio ...ouch

[icm63]

In short, it wouldn't have done anything because the economy only grows at a rate of about 20 cents for every dollar of debt taken on. That is, it takes five dollars of debt to generate one new dollar of GDP.
The bad news is that once you reach the "$1 for $1" level you are no longer able to finance growth with debt, and it becomes inevitable that you will begin to finance debt with debt.
That, of course generates no GDP at all but precipitously tightens the spiral.

http://market-ticker.denninger.net/

Note: I have no idea where the chart comes from.
debt-contribution.jpg

[Chomsky]

Re: New Debt to GDP ratio ...ouch

It's an updated Legg-Mason chart:

http://www.tickerforum.org/cgi-ticke...www?post=67958

[jtabeb]

Re: New Debt to GDP ratio ...ouch

It's an updated Legg-Mason chart:

http://www.tickerforum.org/cgi-ticke...www?post=67958

basically, 2014 is when we will be pushing on a string

[bart]

Re: New Debt to GDP ratio ...ouch

Going back a bit further and viewing the same data in a different way:

[ASH]

Re: New Debt to GDP ratio ...ouch

Going back a bit further and viewing the same data in a different way:

Good stuff.

Seems to me that the data more likely fit a negative exponential, whereas Legg-Mason was doing a linear fit. I think the exponential character of the curve shows up more clearly in your treatment.

Intuitively, I think an exponential dependence must somehow relate to the whole problem of interest and debt-based money. At one level, isn't the overall debt level a surrogate of sorts for the total money supply? Others have remarked that the exponential growth of debt due to interest must be led by the exponential growth of the money supply in order to service that debt. Is this type of curve another way of looking at the same thing?

[Chris]

Re: New Debt to GDP ratio ...ouch

Certainly looks that way ASH. And I bet we all feel exponentially better off than our parents and great grandparents ;)

[bart]

Re: New Debt to GDP ratio ...ouch

Good stuff.

Seems to me that the data more likely fit a negative exponential, whereas Legg-Mason was doing a linear fit. I think the exponential character of the curve shows up more clearly in your treatment.

Thanks, and agreed on the exponential nature of it or even it being the initial stages of a parabolic move.

Intuitively, I think an exponential dependence must somehow relate to the whole problem of interest and debt-based money. At one level, isn't the overall debt level a surrogate of sorts for the total money supply? Others have remarked that the exponential growth of debt due to interest must be led by the exponential growth of the money supply in order to service that debt. Is this type of curve another way of looking at the same thing?

Wow... why don't you ask some simple questions with certain answers like how to understand women? ;)

The area of debt and credit and "total money supply" is almost a religious area in economics, especially in the Austrian vs. non Austrian schools. I tend to favor the non Austrian view and am fairly broad in how I define money and also fairly tolerant of more narrow definitions (except the Austrian ones).

Gov't debt is indeed a surrogate or proxy for total money supply. The correlation with M3 and credit is there but isn't terribly high, especially if lags or velocity aren't added in.

And in the very screwy neo Keynesian "economic understanding" balderdash as is professed by Foggy Bottom (D.C.) residents and Joe 6 pack, gov't debt is the magic elixir that will solve all problems and create none (much like how FNM & FRE solved all the housing issues and created none), the parallel is there sad to say. Its best shown by adding them all up - M3, total credit and total gov't debt - and the story then shows itself as it is, an endemic problem across the decades and with an assured and ugly eventual result... and based on a piss poor overall general understanding of basic economics and its consequences combined with a marked apathy of the bread & circuses poisoned populus (strong emotional opinion and rant to follow :rolleyes: ;) ).

[ASH]

Re: New Debt to GDP ratio ...ouch

Wow... why don't you ask some simple questions with certain answers like how to understand women? ;)

Because I only need to understand one woman, and by marrying an objective and rational spouse, I've pretty much got that one figured out.

The area of debt and credit and "total money supply" is almost a religious area in economics, especially in the Austrian vs. non Austrian schools. I tend to favor the non Austrian view and am fairly broad in how I define money and also fairly tolerant of more narrow definitions (except the Austrian ones).

Can you recommend a non-Austrian textbook that covers the mechanics of debt, credit, and money? My encounters with economics have largely been on the internet, and consequently, I don't think my "knowledge" of such matters is either particularly systematic or diverse. I thought Galbraith's Money -- Whence It Came, Where It Went was edifying, and an entertaining read, but I feel ready for something more meaty. That's partly why I'm asking about textbooks rather than popularizations. If nothing else, I figure I'd better understand what the mainstream thinks is going on, before I expend too much effort denouncing it.

[The Outback Oracle]

Re: New Debt to GDP ratio ...ouch

I need to ask a really stupid question!!! My Economics is from a long time ago (and I am resistant to change:p).
I watched Bernanke last night Aus time). He claimed all the new money is being "sterilised"
Now my understanding of"sterilised" is if you pump money in somewhere, as in the Banking System, then you pull the same amount out somewhere else. Now my reading of Bart's charts so far is that Money Supply has not increased all that much of late. So maybe the Fed is "sterilising"

When these PTB are asked where the money is coming from I have not yet heard a single plain explanation. The answer is always "borrowed" or "sterilised"
You are allowed to beat me about the head with a piece of 4 x 2 here to get the info in...if it is a really stupid belated question.

[metalman]

Re: New Debt to GDP ratio ...ouch

I need to ask a really stupid question!!! My Economics is from a long time ago (and I am resistant to change:p).
I watched Bernanke last night Aus time). He claimed all the new money is being "sterilised"
Now my understanding of"sterilised" is if you pump money in somewhere, as in the Banking System, then you pull the same amount out somewhere else. Now my reading of Bart's charts so far is that Money Supply has not increased all that much of late. So maybe the Fed is "sterilising"

When these PTB are asked where the money is coming from I have not yet heard a single plain explanation. The answer is always "borrowed" or "sterilised"
You are allowed to beat me about the head with a piece of 4 x 2 here to get the info in...if it is a really stupid belated question.

it means the fed has cleaned the instruments before insertion.

[Rajiv]

Re: New Debt to GDP ratio ...ouch

Nystrom's article - Money is Also Destroyed may shed some light here

July 20, 2007


If money can be created from thin air, the opposite is also true: it can be destroyed as well. Usually it is the Federal Reserve System that does the creating, but the destruction comes by other means. Bear Stearns’ hedge fund investors have found this out the hard way. Two of its funds recently went belly up, taking 100% of investors’ capital with them. One of the funds, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage fund, reported $638 million of investor capital in the first quarter. Today nothing remains.

How can money so quickly and effectively be destroyed? To understand this, we have to understand how the money was created in the first place. According to news reports, the underlying securities in the hedge fund in question were subprime mortgages.

Mr. Jones Takes out a Sub Prime Loan

Let’s say it’s 2003, and Mr. Jones, who has less than stellar credit wants to buy a house. He goes to the bank to get a mortgage. The conventional wisdom is that the bank loans him money so he can buy the house. In reality, Mr. Jones is actually borrowing the money from himself, -- or rather against his own future earnings. The bank simply facilitates the real estate transaction between him and the house seller. It does this by writing a note that says ‘we’ve loaned Mr. Jones X dollars and he’s promised to pay us the money back over 30 years. We are holding his house as collateral until the money is paid back.’ This note is called the mortgage, and it becomes the bank’s asset. Under Federal Reserve rules, it can use this asset to create the money to pay the seller of the house.

In reality, the bank has no money, and the mortgage has value only because of Mr. Jones’s promise to pay back the money. As long as Mr. Jones’s promise is good, the mortgage will retain its value and the bank can sell it to another investor – for example a hedge fund.

The Hedge Fund Buys Mr. Jones’s Mortgage

The hedge fund bought thousands of mortgages like Mr. Jones’s, with the hope of collecting a steady stream of income as borrowers paid off their mortgages. That sounded like a good idea, and a solid bet. People traditionally are very good about paying their mortgages back. No one, after all, wants to lose their home. In fact, it sounded like great idea – so great in fact, that Bear Stearns took the $638 million of its investors money, borrowed $10 billion more, (yes, that is a b) and put it all into subprime mortgages.

Mr. Jones Defaults

As it turned out, Mr. Jones, and many more like him were unable to keep their promises to pay the money back. Maybe Mr. Jones lost his job in this terrible economy; maybe he got sick and couldn’t work; maybe he didn’t understand that his mortgage payment was going to jump to something he couldn’t afford; maybe he thought he could sell the house for more money, and never expected to hold on to it this long; maybe he just wasn’t a good credit risk to begin with.

Whatever the reason, Mr. Jones and millions like him had to break their promises about paying back the loans. In the end they’ll just give their keys back to the bank and say, “Thanks, but no thanks. I can’t afford it.”

The banks in turn will say, “Don’t give us the keys. We sold your mortgage a long time ago. We don’t even know who owns your mortgage now, and frankly we don’t care.”

Until now, his debt was an asset of the fund, and was being used as collateral against loans ten times its value. But the moment that Mr. Jones gave up on the idea of home ownership, the value of his mortgage simply disappeared. The paper asset, which derived its value from Mr. Jones’s promise, was destroyed. This had a cascading effect, since Mr. Jones’s mortgage was being used as collateral to borrow money to buy even more subprime mortgages, many of which were also defaulting. Assets purchased on borrowed money were now worthless. Only the debts remained, and suddenly there was more debt than the original amount that investors had put into the fund. These original funds would be needed repay the debts incurred by the fund. Nothing is left to return to investors. This is the process by which money is destroyed.

What about the houses, you ask? Yes, they have some value, but not nearly as much as when they were first purchased. Again, it was not the houses that had the value, it was Mr. Jones promise to pay a steady stream of high interest income over 30 years that was valuable to investors.

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[Adeptus]

Re: New Debt to GDP ratio ...ouch

Hmm.. Sounds to me like the CIA world fact book which still shows USA in 27th position out of 126 countries in the Debt to GDP ratio race, needs to be updated.

Any guesses as to the current placement? 20th or so?

https://www.cia.gov/library/publicat.../2186rank.html

[Starving Steve]

Re: New Debt to GDP ratio ...ouch

Because I only need to understand one woman, and by marrying an objective and rational spouse, I've pretty much got that one figured out.



Can you recommend a non-Austrian textbook that covers the mechanics of debt, credit, and money? My encounters with economics have largely been on the internet, and consequently, I don't think my "knowledge" of such matters is either particularly systematic or diverse. I thought Galbraith's Money -- Whence It Came, Where It Went was edifying, and an entertaining read, but I feel ready for something more meaty. That's partly why I'm asking about textbooks rather than popularizations. If nothing else, I figure I'd better understand what the mainstream thinks is going on, before I expend too much effort denouncing it.

One of the key points that Galbraith makes is that it is impossible to measure money supply and the velocity of money. So what is the point of pretending that you can do so and then to play mathematical games with mis-information and nonsense?

[bart]

Re: New Debt to GDP ratio ...ouch

Because I only need to understand one woman, and by marrying an objective and rational spouse, I've pretty much got that one figured out.

Nice job, seriously.
Is she available for cloning? ;)

Can you recommend a non-Austrian textbook that covers the mechanics of debt, credit, and money? My encounters with economics have largely been on the internet, and consequently, I don't think my "knowledge" of such matters is either particularly systematic or diverse. I thought Galbraith's Money -- Whence It Came, Where It Went was edifying, and an entertaining read, but I feel ready for something more meaty. That's partly why I'm asking about textbooks rather than popularizations. If nothing else, I figure I'd better understand what the mainstream thinks is going on, before I expend too much effort denouncing it.

You probably will be surprised by and won't like my answer much, but my recommendation is to go to both a huge bookstore and also a university bookstore (or a suitable substitute) and browse for things that scratch where *you* itch.

I could tell you my favorite but I can almost guarantee it wouldn't do much for you. I will say you should at least look at some of Keynes books pre 1930 or so. As another rule of thumb, pay more attention to folk whose output can be measured and judged as opposed to over the top theory and similar.

My own economics "education" has been very eclectic and probably almost 1/2 of it is from various articles or posts on the 'net, which I then follow up on as needed.

The bottom line is that economics is not a science and as you've probably seen me quote before, Galbraith also says it well: "Economics exists to make astrology look respectable.".
Jane Robinson of Cambridge University also made a wise comment: "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."

The basic problem is that in my opinion so much of it is just plain wrong or silly or similar, and that's before anything in the political arena is added.

One example is how so many economists say that money supply or velocity can't be measured or aren't useful, and just that one chart of mine that shows 10 year moving averages of M3 and corrected CPI puts the lie to it. Another is how most Austrians think that balances transferred into a checking account are money, while the same balance transferred into a money market fund isn't money. :rolleyes:

[MLM]

Re: New Debt to GDP ratio ...ouch

Hmm.. Sounds to me like the CIA world fact book which still shows USA in 27th position out of 126 countries in the Debt to GDP ratio race, needs to be updated.

Any guesses as to the current placement? 20th or so?

https://www.cia.gov/library/publicat.../2186rank.html

The problem is that this is only public debt. To get the full flavor, you want public+private (after all, given enough 'work' by Congress, they can be considered equivalent).