Don't Worry, We've Had an Even Higher Debt to GDP Ratio Before 15 comments
January 25, 2009
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From The Financial Times, via Paul Kedrosky:
click to enlarge
There is a great deal of consternation regarding the amount of debt this country is about to incur over the next several years, and rightfully so. However, as you can see, debt to GDP has been far higher in the past.
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you cannot compare the past debt write-downs with today as it was impossible to balance the budget in even good time.
I'm sorry, but I think this time it really IS different.
NOMINAL GDP IS ARTIFICIALLY HIGH
First of all, GDP is highly overstated due to government manipulation:
1. Imputations such as the value to homeowners of not having to pay rent are added as dollars to GDP.
2. Hedonic adjustments like the value of "faster computers" that apparently raise the value of computers beyond their dollar purchase price. So "improved" goods and services increase the dollars of GDP beyond their actual prices.
Some one third of our GDP is artificially raised by these imputations and hedonic adjustments. So we're not talking $14+ trillion of GDP in 2008, but rather something more like $10 trillion.
GDP WILL DECLINE
GDP will decline because two thirds of our economy is driven by consumer spending, and consumer spending has tanked. As the economy worsens and people are without jobs and even people with jobs curtail their spending, you can expect GDP to decline. I'd say at from some $10 trillion it will drop down to at least $9 trillion if not lower.
PROPORTION OF GDP DEVOTED TO PRODUCTIVITY GROWTH WILL DECLINE
In recessionary times, less is spent on production and creating pie. People guard their precious thin slices more. With rising crime and violence, we will see a growth in wealth protection and crime reduction. Instead of more money spent on wealth creation, we will see more money spent on wealth preservation.
As the Baby Boomers age, we will see more money spent on life preservation (medical costs, nursing homes, Medicare, Social Security) and less money spent on factors of production and worker productivity. We will also see a decline in the ratio of workers to retirees.
DEBT WILL RISE
Annual government deficit spending going back decades, the cost of the two current wars and their aftermaths, the idiotic stimulus package of early-2008, the more idiotic TARP bail-out package of late-2008, and the coming stimulus plans - all means debt will be higher. Add to that the tsunami wave of Medicare and Social Security atop future government deficit spending, and we know for sure that debt will continue to rise.
What we have is debt getting bigger fast and a smaller-than-imagined GDP getting smaller fast. All of the above draws me to conclude that there is much to worry about.
(2) Wolf's most important point is that the structural current account deficit has to diminish. He mentions some strategies, but before we can reduce that current account deficit, we'd best consider some of the underlying causes.
Best explanation? Look at where Americans are working. In every growing market, you'll find a disproportionate number of Chinese, Indians, Japanese, and Europeans living and working abroad. Those expatriates learn the culture, build networks, and learn how to do business - and over time, they become export drivers from their home country. But you'll find very few Americans working abroad. Why?
Perhaps it has something to do with taxes. Every country except America taxes individuals based on the source of their income: a Japanese citizen who leaves Japan and works in a Korean company does not pay Japanese income taxes. But an American who leaves America and works in that same Korean company would pay both American and Korean taxes. Hence: the Japanese individuals will struggle to take foreign posts in foreign companies - but Americans won't.
* growth not based on speculation to its present degree
* land and home less 'on the market' as now
* ownership of the means of production much more broadly dispersed, cushioning the effect of failures due to natural market fluctuations
* the greatest diference: we could count on a gentle, automatic, virtually invisible growth in internal markets due to population. Its gently swelling demands softened errors in taxation or interest rates, and, ever rising, raised all boats. It was both a market and a producer of goods, the new kids being both consumers and creators of wealth as new workers. It was a human Ponzi scheme, of course--the oldest one in the book.
But we have destroyed that growth. Globalization has helped those countries who destroyed it first to use the populations of other nations both as markets and as workers, skating fast on the gains made by past generations to stay ahead of the grim reaper cutting off speculative growth and leaving healthy real growth underneath. The US, with neither negative nor positive numbers in population, but holding steady, simply topped out in consumption to cause the present crisis. No demands to "buy now" even delivered by droll Ben Stein will have any effect. We're topped out. No one will pay our workers any more, their skills aren't worth it, there is nowhere to sell the products they produce. And the natural, real market growth is not forthcoming. In fact, reports indicate (you won't see these in the stock report) that abortions are up thirty percent with the present troubles.
No, these times are not like those times, dear optimist. The invisible trampoline is gone. In the name of "freedom" (of the cheapest sort) we have killed it. Fifty million consumers killed in the last forty years. And we refuse to debate it. And we have just inaugurated a guy who doesn't get it far worse than Bush ever didn't. I'm talking financially. Because that's what you talking when you're talking abortion and the legitimazation of non-fertile sexuality.
Thou Shalt Not Kill--your market! Babies! Roll back Roe, and start paying women to stay home and raise babies, and we stand to recover little by little as the million we kill every year begin to consume. But--that would be uncool! But we are not ever going to recover without it.
Yes, public debt has been higher in the past.
But both the UK and the US previous spikes were due to major wars: Napoleon on the former and WW II for the latter.
But either way, the other major missing salient point is private debt.
In the past private debt didn't matter that much because it never amounted to a major percentage of GDP.
But that isn't true anymore. The advent of the FIRE (Financial, Insurance, Real Estate) economy has catapulted private debt to levels over even public debt.
Thus while public debt today is not as high as it has been in the past, the combination of public and private debt is as high as ever seen in history. As the massive public spending in both the UK and US continues, the aggregate sum of public and private will easily surpass all previous efforts.
And while in the 2 wars - the populace of each respective nation were willing to undergo major sacrifices in order to 'fight for freedom', I for one have zero eagerness to sacrifice to fight for my neighbor's Alt-A loan, or a big 5 bank's bonus pool, or Joe Blow's $10,000 credit card debt incurred buying a 52" LCD TV which I myself prudently have not yet bought.
Before it was 'God Save the Queen' and 'Uncle Sam Wants You'.
Somehow 'Bailout for Banksters' and 'Help for Debtor Dan' doesn't have the same ring.
The types of services being supplied in the current economy are not "productive". Examples of mis-valued services:
1. Suing each other to the point where a lawyer class can be supported,
2. Making the tax code so complex that accounting is more valuable to a company than engineering,
3. Charging each other $100 for aspirin and all of the other healthcare overcharging
The idea that the government could ever tap the nations 10 to 15 Trillion dollar GDP for debt repayment is too rosey. I propose a different language for debating the creditworthiness of government. Use its revenue in a tax year. The US budget of approximately 2.9 trillion should be compared against its debt load: ~ 10 Trillion.
Note that this does not account for entitlements, but tells a scary enough story. Would you loan any more money to a school teacher who makes $30,000 who is carrying a $90,000 credit card balance?
On Jan 25 04:19 AM Hillsfar wrote:
> Sir:
>
> I'm sorry, but I think this time it really IS different.
>
> NOMINAL GDP IS ARTIFICIALLY HIGH
> First of all, GDP is highly overstated due to government manipulation:
>
>
> 1. Imputations such as the value to homeowners of not having to pay
> rent are added as dollars to GDP.
> 2. Hedonic adjustments like the value of "faster computers" that
> apparently raise the value of computers beyond their dollar purchase
> price. So "improved" goods and services increase the dollars of GDP
> beyond their actual prices.
>
> Some one third of our GDP is artificially raised by these imputations
> and hedonic adjustments. So we're not talking $14+ trillion of GDP
> in 2008, but rather something more like $10 trillion.
>
> GDP WILL DECLINE
> GDP will decline because two thirds of our economy is driven by consumer
> spending, and consumer spending has tanked. As the economy worsens
> and people are without jobs and even people with jobs curtail their
> spending, you can expect GDP to decline. I'd say at from some $10
> trillion it will drop down to at least $9 trillion if not lower.
>
>
> PROPORTION OF GDP DEVOTED TO PRODUCTIVITY GROWTH WILL DECLINE
> In recessionary times, less is spent on production and creating
> pie. People guard their precious thin slices more. With rising crime
> and violence, we will see a growth in wealth protection and crime
> reduction. Instead of more money spent on wealth creation, we will
> see more money spent on wealth preservation.
>
> As the Baby Boomers age, we will see more money spent on life preservation
> (medical costs, nursing homes, Medicare, Social Security) and less
> money spent on factors of production and worker productivity. We
> will also see a decline in the ratio of workers to retirees.
>
> DEBT WILL RISE
> Annual government deficit spending going back decades, the cost of
> the two current wars and their aftermaths, the idiotic stimulus package
> of early-2008, the more idiotic TARP bail-out package of late-2008,
> and the coming stimulus plans - all means debt will be higher. Add
> to that the tsunami wave of Medicare and Social Security atop future
> government deficit spending, and we know for sure that debt will
> continue to rise.
>
> What we have is debt getting bigger fast and a smaller-than-imagined
> GDP getting smaller fast. All of the above draws me to conclude that
> there is much to worry about.
1. The UK's debt after the Napoleonic wars was largely owed to domestic creditors (although it is true that many of these were merchant bankers with wide connections on the continent); furthermore, the decline in debt as a percentage of GDP over the following decades came at a time when the British Empire was at its zenith - dominating global commerce and as yet untroubled by the rise of Germany (barely a country at that time) or the United States (still an LDC). Similarly, US debt after WW2 was largely domestic, and the ensuing decline relative to GDP came in a period when US industry and commerce dominated the world.
2. UK debt after WW2 was owed largely to foreigners, specifically the US, and reducing it as a share of GDP was a deeply painful experience - as anybody who knew the UK in the late 1940s and the 1950s can attest. I am certainly not arguing that the US today is in anything like as bad a position as the UK was in 1945, but there are sufficient broad-brush parallels (notably in respect of foreign indebtedness and imperial decline) to raise doubts about the rather simplistic conclusions drawn in Toro's article.
Are Social Security borrowings included?
I've heard a rumor that the actual amount of dollars in the Social Security system is ZERO.
I don't believe the debt numbers , and would like to see the chart with ALL realistic debt included.
I also am guessing that the GDP is padded with - well , padding.
The actual realistic number is likely somewhat lower and dropping.
I cant believe the amount of blind , non acceptance to the enormity of our financial situation.
It is now routinely viewed as a "crisis , like we've been in before , and this one will pass like the others have. So buy and wait".
How is this going to pass?
It is not a "spot crisis" .
It is a culmination of long term poor practices (overspending , overborrowing , and insufficient productivity to support this) .
And the "cure" is to create dollars out of thin air and prop up insolvent enterprises with MORE DEBT.
Yeah , they're broke now , but more debt will cure them -
As everyone knows , the best way to put out a fire is to
POUR MORE GASOLINE ONTO IT????
Today, the world is not clamoring for our goods. We ran up a debt fueling our bad habits and our consumer culture.
Further, one needs to look at the total tax burden (including state and local governments) for a comparison. That total burden is what impairs our finances. If you don't believe that state and local debts will feed into the federal debt wait a bit. I expect will see them start coming onto the federal books this year.
The chart ratios depicted in this article are directly contradicted by the following:
1) Jeremy Granthan in Barron’s dated Feb 11, 2008 shows debt to GDP ratio is > 300%, the highest ever.
2) Marc Faber on his website dated Oct 9, 2005 shows 3 years ago ratio > 300% and rising.
3) Financial Times article dated Dec 12, 2008 titled “FT Alphaville: Welcome to debt central” shows debt to GDP = 356% as of 2Q08.
Further, the ONLY time in history debt even approached today’s extreme level was 1929, and then it was LOWER than today (300% in 1929 vs 356% today) per FT cited above. All 3 sources are not wrong. This is the 2nd article I’ve seen this weekend that tries to dismiss our debt level as serious. I suspect the snake oil salesman are trying to sell a rally to the gullible.
I expect this crap from CNBC, not here.
Private debt is higher than ever before.
Public debt is not........yet!!!!
Remember, the gov't is now buying this private debt.
Next they plan to add new public debt (stimulus plan).
That chart will be 'old' news and WAY out of wack by the spring.
On Jan 25 08:57 AM Spudster wrote:
> I'm sorry, but with analysis like this - who needs morons?
>
> Yes, public debt has been higher in the past.
>
> But both the UK and the US previous spikes were due to major wars:
> Napoleon on the former and WW II for the latter.
>
> But either way, the other major missing salient point is private
> debt.
>
> In the past private debt didn't matter that much because it never
> amounted to a major percentage of GDP.
>
> But that isn't true anymore. The advent of the FIRE (Financial, Insurance,
> Real Estate) economy has catapulted private debt to levels over even
> public debt.
>
> Thus while public debt today is not as high as it has been in the
> past, the combination of public and private debt is as high as ever
> seen in history. As the massive public spending in both the UK and
> US continues, the aggregate sum of public and private will easily
> surpass all previous efforts.
>
> And while in the 2 wars - the populace of each respective nation
> were willing to undergo major sacrifices in order to 'fight for freedom',
> I for one have zero eagerness to sacrifice to fight for my neighbor's
> Alt-A loan, or a big 5 bank's bonus pool, or Joe Blow's $10,000 credit
> card debt incurred buying a 52" LCD TV which I myself prudently have
> not yet bought.
>
> Before it was 'God Save the Queen' and 'Uncle Sam Wants You'. <br/>
>
> Somehow 'Bailout for Banksters' and 'Help for Debtor Dan' doesn't
> have the same ring.
A few things to chew on................If the government fails it starts over with whatever the public debt is....paid for by the bonds that back it up. Our trade deficeit's are rectified with purchases of our debt by those countries that are profiting from the trade. The debt is a fallback plan invented becasue nothing lasts forever. Quit acting like a high debt is really a problem and realize having one, as far as fiat currency is concerned, is a good thing!
Supply and Demand. Government's do not make money off of each other, only private business's that are watched like hawks by all the parting governments can do this and the resulting influx of cash by the benefactor is rectified by spending that cash in their country by purchasing debt, or cash gift's which most moron countries seem to want the most. There is nothing to fear, but fear itself. Quit whining and pick your battles more precisely with what you know rather than what you have read in the paper.
On Jan 25 08:57 AM Spudster wrote:
> I'm sorry, but with analysis like this - who needs morons?
>
> Yes, public debt has been higher in the past.
>
> But both the UK and the US previous spikes were due to major wars:
> Napoleon on the former and WW II for the latter.
>
> But either way, the other major missing salient point is private
> debt.
>
> In the past private debt didn't matter that much because it never
> amounted to a major percentage of GDP.
>
> But that isn't true anymore. The advent of the FIRE (Financial, Insurance,
> Real Estate) economy has catapulted private debt to levels over even
> public debt.
>
> Thus while public debt today is not as high as it has been in the
> past, the combination of public and private debt is as high as ever
> seen in history. As the massive public spending in both the UK and
> US continues, the aggregate sum of public and private will easily
> surpass all previous efforts.
>
> And while in the 2 wars - the populace of each respective nation
> were willing to undergo major sacrifices in order to 'fight for freedom',
> I for one have zero eagerness to sacrifice to fight for my neighbor's
> Alt-A loan, or a big 5 bank's bonus pool, or Joe Blow's $10,000 credit
> card debt incurred buying a 52" LCD TV which I myself prudently have
> not yet bought.
>
> Before it was 'God Save the Queen' and 'Uncle Sam Wants You'.
>
>
> Somehow 'Bailout for Banksters' and 'Help for Debtor Dan' doesn't
> have the same ring.