Jeremy Grantham: We Need to Halve Private Debt 26 comments
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Great new Jeremy Grantham quarterly note out from GMO. Highlights include a lucid discussion of what I’ve been calling “the new normal”, what a post-crisis world looks like in terms of leverage, debt, corporate profits and growth. He thinks we need to halve private debt speedily, or risk the U.S. falling into a Japan malaise. Trouble is, there are few expedient ways to do it, other than wiping it out or inflating it away. (He also doesn’t like most of Obama’s financial markets picks, so he has that going for him.)
Highly worth reading.
Under the shock of massive deleveraging caused by the equally massive write-down of perceived global wealth, we expect the growth rate of GDP for the whole developed world to continue the slowing trend of the last 12 years as we outlined in April 2008. Since this recent shock overlaps with slowing population growth, it will soon be widely recognized that 2% real growth would be a realistic target for the G7, even after we recover from the current negative growth period. Emerging countries are, of course, a different story. They will probably recover more quickly, and will continue to grow at double (or better) the growth rate of developed countries.
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That being said, I'd like to see countries develop an indicator of GDW (gross domestic well-being) as more meaningful than GDP. There are no theoretical upward limits to GDW.
On Jan 24 09:15 AM axelrod608 wrote:
> I have a problem with the neverending growth folks. The idea that
> we can "grow GDP" at some percentage forever is absurd. Assume 4%
> and take it forward, say, 100 years. There's not enough resources
> on this globe to support an economy at that level. And last time
> I checked we didn't have extra planets to mine.
>
> The worst extension of this absurd theory is when government makes
> assumptions based on neverending growth. Social security, Medicare,
> the national debt - all are based on the assumption we will "grow
> our way out of the problem" that exists.
>
> It's time to use SUSTAINABILITY not neverending growth as the underlying
> basis for our policies. Policies that work based on sustainability
> would be enhanced by whatever growth occurs. No like the present
> mess that unravels when the growth required to make the policy work
> doesn't happen.
>
> Screw ZIRP. We need zero based budgeting. Get the zeroes right.
1. "Debt Crisis";
2. "Growth vs. Sustainability";
3. "Efficient Use of Resources and Productivity";
4. "Corrupted Financial System";
5. "Liquidation of Insolvent Institutions";
6. "Nationalization of Insolvent Banks";
7. "GDP Inflation With Debt";
8. "Gross Domestic Well Being (GDW) vs. GDP
I haven't counted the words exactly, but all of these topics have been discussed in less than 1000 words. Hat's off to you all.
Readers: You should go back and read this article again, along with the less than 1000 words of comment. You may never again get so much information with as little time investment.
Alphameister - - -
I'd add one thought to your GDW proposal: To be effective it would have to be measured by a non-government agency. If there ever was a concept subject to political manipulation, it would be GDW.
I apologize in not specifically thanking you in the preceding comment. You also have written a short but very meaningful article, with the appropriate link for the full Grantham reference. You have written an article equally as succinct as the comments.
If brevity is the soul of wit, then you (and your commenters) are truly soulful.
That's why I wonder who is so crazy selling short banking stocks at this prices as banks, even having their own problems and mountains of debt, in the end will profit the most from bankruptcies, aquisitions, reorganizations.
Banks are like veins in the living organizm, even if all the organs are healthy or sick, they need veins to distribute the crucial thing the blood.
Bank's are the core to all finances from smaller transaction sending 100$ to Mexico by Western Union to MSFT buying YHOO.
Everything that have connection to money in any form, have connection and pays a bank to get things done.
Those investors that bought banking stocks 1 year ago will not see their money back probably for next 20-30 years, but those that buy now and diversify around 20-50 different banking stocks might expect a nice return and income after the dust will settle.
I don't see a danger buying bank's stocks now, then again I repeat, buy as many bank stocks as possible as some banks may go down under.
Real productivity gains are indeed to be desired, but the way the gummint computes them is ludicrous. If a company replaces a computer with one twice as fast, the gummint sez you've doubled that worker's productivity. In the real world, that computer user puts out the same identical "product" using either 'puter. The gummint "productivity" numbers are no more accurate than their unemployment numbers which are roughly half of the real life jobless rate.
I strongly recommend reading HOW TO LIE WITH STATISTICS, an old book. Last I checked it was out of print but copies show up at Amazon from time to time. It is difficult to form accurate opinions when the data stream is as ruthlessly massaged as are gummint numbers.
oil revenues would pay for the war - that was the public pronouncement of wolfowitz, cheney et al/
this shows either fraud from the outset, or gross misundertanding of how the u.s.a. is perceived in that part of the world, take your pick.
> jack
A recent ISI estimate put the bad debt held by the top four US banks at $1.2 T - roughly double their current market cap. Roubini estimates all US banks are holding $3.2 T in bad debt.
Put money in bank stocks now if you aspire to wear a Timex.
Rather lame rejoinder. I didn't cite government statistics on productivity, but no reasonable person would deny the vast gains in productivity over years that have seen 5 pound notebook computers provide substantially more processing power than roomfuls of computers 50 years ago. Such gains will continue for as long as human minds are free to innovate.
On Jan 24 03:15 PM axelrod608 wrote:
> >> "Seems to me you are not allowing for productivity gains" >>
>
>
> Real productivity gains are indeed to be desired, but the way the
> gummint computes them is ludicrous.
DJIAM will fall bellow 8,000 mark in order to create a reaction. 7000 could be a new support during this week.
The stimulus package will help one day o two, but the next day the trend will continue downhill. Investors want facts not promises. Feb 16, 2009 might a bottom of bottoms.
On Jan 24 08:03 AM rm wrote:
> Funny, with all the talk of "We need to get lenders lending," spewing
> out of Washington, I thought the government's postion was that we
> need to HAVE private debt.
maybe you had a friend or family member buy in South Florida in the last ten
years...that home or condo is declined 50-75% from peak and sliding faster as we speak.
Anyone and I say anyone connected to sales or commissions to include restaurants, travel, hotel, auto, yacht, real estate, construction is now
earning 65-80% less money. The entire local economy is in ruin.
Jupiter, Palm Beach, Boca Raton, Fort Lauderdale, Miami, Sarasota, Naples,
Tampa, Orlando..massive problems and crime on the rise.
I like John Wayne to...but ten years of homeowners are headed towards the streets down here...it's a very depressing situation. Best to let tough talkers stay in the movies. The golden goose is dead... high costs of property taxes
and insurance are adding to the burden.
We've got to do SOMETHING to prevent another Bush from getting anything but a citizen's tour of 1600 Pennsylvania Ave. We can't afford another Bush.
On Jan 24 09:18 AM axelrod608 wrote:
> Finally, when G W Bush was sworn in, the national debt was $4.8 T.
> This week I heard the first call to increase the National debt to
> $12.8 T.
>
> Yes, we need less private credit. But we also need the gummint to
> get on the less is more express as well.
Other than breach-of-contract issues, I'm not smart enough to foresee all the other consequences. However, there is already talk of forcing cramdowns, having courts modify loans, etc. so I think it could be done, and it would be a lot less messy.
Until the debt is cleared away, the country can't begin recovery.
So we must brace ourselves for the destination as the economy twists and turns towards its equilibrium point. Jeremy may be right to buy stocks at sp500 at 600.
Excessive Debt makes Slaves of us All!
Debt is only positive when it is used Synergistcally and produces more economic output than it consumes.
This we have NOT learned, and therefore CANNOT practice, hence , the steady economic erosion and downward spiral in our country.