phillips49

Defining a Depression

Thoughtful article, but it seems to me that comparing Credit Market Debt to GDP is a very narrow parameter to evaluate our current condition. Considered by itself, it would be a little scary, especially since there is an implied comparison to the 20's and 30's.

But, comparing debt to GDP is really more like measuring debt to cash flow. OK, so we owe 3.56 times our current income. Is that really bad? If an individual makes $50K per year and has total debt including mortage, cars, loans and credit cards of $178K, is that really bad? Well, it really depends on the maturity of the debt. If it was all due today, it would be a big problem. But if it is spread out over 20 years, it might not be.

Another way of looking at our current financial condition might be to look at our debt to equity ratio. We would look at debt to equity ratios to examine the financial condition of a company that we where considering buying stock in.

In 2005, the per capita wealth of the the US was $513,000 against a population of 296 million making our equity worth $151 trillion. That yields a debt to equity ratio of 0.3. Not to shabby

You could also look at debt as "the price" and GDP as "earnings" which would yield a P/E of 3.5, again not to shabby.

That we have had a succession of bubbles is undeniable. The bubbles are now deflating. What happens during the bubble building and deflating process? If one bought at the beginning of the bubble and held until the bubble deflated, there would be zero gain. If one bought at the beginning of the bubble and sold at the top, one would have a gain. If one bought at the top of the bubble and sold at the end, one would have a loss. So it appears to me that bubbles do not create or destroy wealth, they simply transfer wealth.