John Maudlin: When Debt Gets Bigger than GDP It's Big Trouble 17 comments
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John Mauldin's post this week, via Barry Ritholtz, goes over some of Mauldin's ongoing concerns specifically the debt we appear to be on the way to building. One very simple way Mauldin says to think about the magnitude of the debt and when it really might be big trouble is if it ever gets bigger than GDP.
He says that we can go on with a large (vague on purpose) debt load for quite a while but that the real problem will come when debt exceeds GDP. I've started to read him some lately and he seems to expect very bad things to come our way and unfortunately like many articulate people spelling out a bear case his comments are very compelling.
"Unfortunately" from the standpoint of hoping he is wrong.
If Mauldin and others making similar arguments are wrong then the portfolio changes needed will be far less radical--we don't really need to protect against things working out just fine. If these guys are right then people will have to make big changes to their portfolios. Taken to the extreme it would no make sense to own domestic anything save for maybe a defense contractor.
If you read investment blogs then you are probably already disposed to learning more about everything related to investing which is good because if Mauldin et al are correct it will be crucial.
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It will not arrive because the economy will sink/default before that point.
The last depression occured when debt repayment as a percentage of GDP went over 30%. The current depression when it got to about 34%.
Narrowly it is around $7.5 trillion; add in borrowings from Social Security it is around $12.5; add in future defcits you are up to $21.5; add in the craters of Social Secuity and Medicare it's more; and add in the GSE's its yet more.
Under various Fed and FDIC programs we have loaned out the Treasury's balance sheet for a few basis points to help the too big to fail banks raise capital. Some are still taking advantage of this program which only expands explicit guarantees and complicates the process of evaluating our solvency.
Just with $12.5 trillion and the $5 to $6 trillion of GSE debt, our debt to income is around 140%. This is exactly why in the same article John believes our debt could be the next "finger of instability" that will disturb a "critical state" and possibly create chaos.
to the other commenters the point i was referring to was not total indebtedness of the country which would include consumer and corporate debt.
On Oct 05 08:30 AM JeffDB wrote:
> I was hoping you'd give a critique of his article, perhaps showing
> why you might agree or disagree with him on various points.
> on going context; I've never been in the armageddon camp.
>
> to the other commenters the point i was referring to was not total
> indebtedness of the country which would include consumer and corporate
> debt.
-----
OK, thanks for the reply.
But why are you not in the Armageddon camp? Just a gut feeling, or do you think there are other relevant examples of countries and its citizens getting heavily in debt but not suffering for it very much? Or something else ... ?
On Oct 05 08:30 AM JeffDB wrote:
> I was hoping you'd give a critique of his article, perhaps showing
> why you might agree or disagree with him on various points.
Interestingly, this crew is almost never held accountable for their often failed philosophies. I suspect the accountability issue or lack thereof is based on the appeal of lower taxes, gold coins, a failed food supply chain, and government intervention etc.
Following the “sage” advice of this cluster is similar to betting against a Las Vegas Casino. Hey, who do you believe pays for the crystal chandeliers. Paraphrasing let the ultra sensitive ear beware of the perpetual negativity of the Siren’s song!
On Oct 05 08:42 AM Roger Nusbaum wrote:
> on going context; I've never been in the armageddon camp.
>
> to the other commenters the point i was referring to was not total
> indebtedness of the country which would include consumer and corporate
> debt.
> Alas, Armageddon journalism sells books, journals, and convention/meeting tickets in exotic locales. Previous masters of this “art” during my investment carrier include the likes of Howard Ruff, Gary Schilling, Doug Casey, Gary North, Ravi Batra and John Mauldin among others.
Interestingly, this crew is almost never held accountable for their often failed philosophies. I suspect the accountability issue or lack thereof is based on the appeal of lower taxes, gold coins, a failed food supply chain, and government intervention etc.
Following the “sage” advice of this cluster is similar to betting against a Las Vegas Casino. Hey, who do you believe pays for the crystal chandeliers. Paraphrasing let the ultra sensitive ear beware of the perpetual negativity of the Siren’s song! >
While that may be a legitimate argument to bring up, saying that the boy who cried wolf has been wrong 3 times already, doesn't necessarily prove that we can give the "all clear" when he cries out that a wolf is coming for a 4th time. I remember seeing a video of a panel discussing the recent mortgage crisis and the editor of the "Economist", who noted that they had been warning of the imbalances for several years, asked the rhetorical question "How far in advance of a crisis can one warn of catastrophe before one begins to lose their credibility?"
Although false alarms in the past might give one pause in believing someone crying out a warning now, I wouldn't totally disregard them on that basis alone.
I think that is all the more true if there are multiple people involved and someone points out that we should disbelieve person "D" because persons "A", "B" & "C" have been wrong in the past.
I think a case could even be made that in our present situation, some of the others may have been wrong, but perhaps only in their timing as in fact we were just visited by the wolves recently and some of those people had been rather prescient in their warnings.
In fact, if we look at the recent warnings it would seem those that were issuing the warnings were correct, and those that were pooh poohing those warnings, or even laughing at those giving the warnings have egg all over their collective faces.
For instance, contrast the accuracy of people like Marc Faber or Peter Schiff:
Peter Schiff was right (new) - 2002 to 2009 with exact dates.
www.youtube.com/watch?...
With those such as the current leader of our Federal Reserve, Ben Bernanke:
Bernanke: Why are we still listening to this guy?
www.youtube.com/watch?...
Even John Maulden, whom you lump in with those with with failed philosophies, warned of the building pressures for a crisis like we went through a couple of years before it hit, in the very article linked to from this one. One might have reasons to discount his prediction, but to just attack the person's credibility and by implication everyone who holds similar views doesn't seem to be a very strong argument, particularly just after their prediction came true.
The bottom line for me, is that I would like to see the arguments pro and con and try to evaluate them on my own. Those warning of major problems coming up have made credible arguments for their viewpoint, in my opinion, I would hope those who take the opposing view would lay out their own reasoning, facts and figures in a logical attempt to disprove their conclusions.
Ad hominem attacks aren't a strong logical argument.
Stock-flow consistent economic models
This is essentially a political problem rather than an economic one.
See Bill Mitchell: Stock-flow consistent economic models @ billyblog
bilbo.economicoutlook....
> In the article John presented material that included private debt and state and local debt in calculating debt to GDP percentages; while making for sensational reading and graphs, it is not within the bounds of convention. The IMF and others look at public debt to GDP to understand the degree of indebtedness of a country........and we have plenty of problems we limit measures of debt to just public debt. >
That's certainly a valid point. So were the others you raised in your prior post seekingalpha.com/artic... about including a lot of the other items (Though the "official" US Debt is $11,920,519,164,319.42 rather than the $7.5 trillion you used - though perhaps that's because you posted a little earlier in the day ;) .)
But even though it is not the normal convention, I think it is still reasonable to bring up personal debt in this context. In another thread someone, in responding to someone who brought up the fact that our debt to GDP was higher after WWII than it is now, that there were some important differences. One was that the deficits were war related. When the war ended so did some of those massive expenses which ran up that massive debt. Another is that the citizens was not up to or beyond their eyeballs in debt themselves. It's a lot easier for a country to grow it's economy out of such a situation if the workers aren't busy digging out of their own holes.
So while it may be apples to oranges from one perspective in including consumer debt with national debt in a comparison with a prior point or points in history, from another perspective, it seems it is valid to at least point out that the massive consumer debt may play a role in any potential future recovery.
> According to modern monetary theory, the sovereign issuing a fiat currency can always fund non-government net financial asset surplus (saving) through government net financial asset deficits. The only thing preventing this outmoded thinking that compares the government to households and firms. >
But this presumes there is no limit to government debt. That presumption does not seem plausible to me, and I think there are quite a few historical examples of countries that ran up against limits to that assumption and in effect hit a brick wall, or fell off a cliff depending upon one's preferred metaphor.
Either someone or someones willingly loan them the money to run up that debt, or they need to "print" the extra money to finance those deficits. There are obviously limits to how much will be loaned to them and the monetization of that debt has consequences as well, sometimes disastrous ones.
While the above is true it is also true that Schiff has contributed much to the stream of consciousness about the mistakes made and the resulting problems.
I do not agree with him on magnitude and he seems to use adjectives that go beyond what the reality is. To read him a couple of years ago you would have thought the result by now would be martial law, riots and the complete tearing of the social fabric. Instead we have debates about whether the recession is over or not.
I agree with him in terms of direction but not magnitude.
On Oct 05 10:23 AM JeffDB wrote:
> On Oct 05 09:48 AM jse17 wrote:
> I think Schiff is a complicated example. By his own admission he was many years early. >
By his own admission he is also a reader of long term macro trends and not a market timer. I think that gets back to the editor of the "Economist"'s rhetorical question about losing one's credibility by being too far ahead of the game.
In the context of this thread, and jse17's post in particular, that the Gloom & Doomers are misguided at best and charlatans at worst, I would submit that being right, but off in timing is not a reason to dismiss their current analysis out of hand. If a doctor had warned a patient that he was too overweight, drank to heavily and smoked too much and was likely to get diabetes, have a heart attack or stroke as soon as next year if he didn't straighten out his act, I wouldn't consider that doctor a quack if that patient made it 3 years before his heart attack. I would hope that patient wouldn't use the "mis-timing" as an indication that he could disregard his current and more vehement admonitions to quit smoking etc.
> Further it would appear that the things he was right about did not help his clients in 2008 as Mike Shedlock detailed earlier this year. >
I have a couple of thoughts on this subject. The first would be that although it is not totally irrelevant, it is tangential to the topic at hand. Money management and macro economic trends are two totally different, though somewhat related, skill sets. Being a speed burner would obviously be a great benefit to a wide receiver in football, but not all sprinters are good wide receivers. Being a poor wide receiver would not "prove" that the athlete was a poor sprinter.
Similarly, being a poor money manager doesn't necessarily mean one is poor at interpreting the macro economic fundamentals. BTW, I don't think Peter Schiff is a poor money manager, as I'll address below. I'm just commenting on the apparent implication of this particular line of reasoning.
I can relate to this on a stock picker's level. I think one can be very astute in determining whether a company's stock is over or undervalued on a fundamental basis, and yet lose their shirt when trying to cash in via the options market. I believe it was Keynes who coined the oft repeated aphorism that "The market can stay irrational longer than you can stay solvent." In other words, I wouldn't totally discount someone who had a bad year in the options market as necessarily being poor at the fundamental analysis on the value of a company's stock. If that was the only piece of evidence I had, I would be more prone to take their analysis with a grain of salt, but if I knew they had warned AIG was greatly overvalued and was going to crash hard, but had lost a lot of money by shorting them too early, I might actually me more inclined to listen to their next warning rather than less inclined to do so.
Secondly, I think Mr. Shedlock's critique of Mr. Schiff's money management skills is at least a bit misleading. I think the sample size is too small for an accurate picture, both in terms of chronology and in terms of the investors he has spoken with. Mr. Schiff takes issue with other points and gives a bit more of his side of the story in this post on Seeking Alpha: seekingalpha.com/artic...
> While the above is true it is also true that Schiff has contributed much to the stream of consciousness about the mistakes made and the resulting problems. >
I think that dovetails into my point. Mr. Schiff and Mr. Mauldin pointed out the mistakes our government was making and the systemic imbalances and the problems they were likely to lead to *before* they happened. They and others, such as Marc Faber are still jumping up and down and warning that the systemic imbalances have not been corrected and in fact may be getting worse and that this will cause even bigger problems down the road unless we begin to take corrective action ASAP. Saying that others have made such claims in the past and been wrong, or that these guys have made these claims and been right but weren't perfect on the timing, and that their warnings should therefore be dismissed out of hand without addressing their underlying facts and logic seems rather foolhardy to me.
> I do not agree with him on magnitude and he seems to use adjectives that go beyond what the reality is. To read him a couple of years ago you would have thought the result by now would be martial law, riots and the complete tearing of the social fabric. Instead we have debates about whether the recession is over or not. >
But this was not just any old recession. By even the administration's public statements we narrowly dodged a veritable Armageddon bullet and that, only because of unprecedented intervention by the Federal Reserve and the Treasury. I don't think you'll find any mainstream economist who doesn't believe we were on the brink of an international financial meltdown and our government in effect single handedly saved multiple major banks, Fannie Mae, Freddie Mac many other financial institutions, and two of the Big 3 automakers, veritable economic behemoths not all that long ago. We're still reeling with the FDIC basically insolvent without another infusion of money, record numbers of banks that have gone bankrupt in 2008 and even more slated for bankruptcy this year. Unemployment is estimated to be in double digits if "discouraged workers" who have dropped off the unemployment rolls are counted, and repossessions of homes are at unprecedented levels. Tent cities have been in the news presumably because of all the new homeless families, and cities and states are struggling to stay afloat.
I think a "complete tearing of the social fabric" was not as far fetched a risk as it might seem, and who knows, the story isn't over yet. We're still participants in new history in the making.
> I agree with him in terms of direction but not magnitude. >
But magnitude, like timing, is exceptionally hard to get perfectly right. I personally won't take any prognosticators to task if they are a bit off on either timing or magnitude. Hearkening back to the doctor who pulls out some charts and studies warning that if his patient doesn't lose weight and start exercising, quit smoking and binge drinking he may be dead within 3 years, I certainly wouldn't disregard future warnings if that patient only suffered a minor heart attack, or was told he had hardening of the arteries and would need bypass surgery. Even if his timing estimates of future problems were off, &/or warnings about the potential magnitude of those problems didn't come to pass within that timeframe, I don't think it would be prudent to dismiss future warnings without at least trying to evaluate the facts to some extent.
As opposed to 'brilliant' people like Greenspan and Bernacke? Have they ever been right??
On Oct 05 09:48 AM jse17 wrote:
> Alas, Armageddon journalism sells books, journals, and convention/meeting
> tickets in exotic locales. Previous masters of this “art” during
> my investment carrier include the likes of Howard Ruff, Gary Schilling,
> Doug Casey, Gary North, Ravi Batra and John Mauldin among others.
>
>
> Interestingly, this crew is almost never held accountable for their
> often failed philosophies. I suspect the accountability issue or
> lack thereof is based on the appeal of lower taxes, gold coins, a
> failed food supply chain, and government intervention etc.
>
> Following the “sage” advice of this cluster is similar to betting
> against a Las Vegas Casino. Hey, who do you believe pays for the
> crystal chandeliers. Paraphrasing let the ultra sensitive ear beware
> of the perpetual negativity of the Siren’s song!