Randy Kirk

Jim Welsh on the Economy: Past the Point of No Return

An interesting aspect of the Morgan Stanley chart showing total debt as a percentage of gdp is that most of the debt increase from the 1950's to current occured in three sectors: household, financial and GSE. Most of this (I believe) should be in mortgages.

GSE debt -- mainly Fannie and Freddie, includes the bonds on the liability side of the GSE's balance sheets. I can see Freddie had approx. $800Bn of bond debt in 2007 (2008 info unavailable) according to their 2007 10-k. These bonds were used to fund purchases of (conforming) mortgages.

Consumer debt tends to be highly mortgage based, as houses are typically the largest component of most families net worth.

Financial firms will include commercial banks which lend heavily to real estate.

What is interesting is that GDP is calculated by the BEA mainly by summing up salaries, and then backing into GDP by using the formula Consumption = salaries - saving, for use in the formula for GDP = C+I+G+ Net Exports. (on this point, see the original discussion of GDP measurement by Nobel laureates Richard Stone and Simon Kuznets) nobelprize.org/nobel_p...

So this shows that not even adjusting for median (not average) salary, credit risk is rising for the sectors that took on the most debt., -- this is more clarification on the most obvious factor that the overall national debt appears to be rising. As the increase in debt is based on the value of land, plus salaries, the crisis appears to be exacerbated by a) declines in land values and/or b) declines in average and median incomes. Conversely, the crisis should appear to be on the mend when a) land values stabilize and start to appreciate and/or b) median and average salaries start to stabilize and appreciate.

Oil Looks Toppy - Time to Short?

Oil is highly priced because of the marginal utility of each extra unit of oil. "Why are diamonds, which are frivolous, expensive while water, while necessary for life, is inexpensive?" - Adam Smith asked this -- also known as the Paradox of Value. Economists more or less believe the solution to the Paradox of Value lies in the concept of marginal utility, as each additional unit of water was not valuable, because there was no shortage. If there is a shortage of oil currently, then it makes sense that oil is highly priced since it is significantly price inelastic.

The Markets Are Heading Straight Up? Think Again

Interesting -- the investment rate -- I've often thought that this was the key determinant, driving up equity values. I'm wondering, where did you get the IR information?

That is one huge decline in the IR after 2007 -- do you see the same sort of decline in other stock markets around the world? (odd to me that something like the Indian stock market would just start to get going (since 2003) and then suffer a prolonged bear market, if the economy continues growing)