An Unsustainable Path of Debt Expansion

[Misthos]

Quote from vulture:

Misthos really nails it. The expansion of derivatives that went into overdrive starting at the beginning of this decade is definitely a symptom of a monetary system nearing its end. The lax lending standards, packaging of bad debts, etc, etc were simply heavy handed attempts to continually feed the credit machine to buy the system a few more years.

So, in reality, it has been "inflate or die" for longer than we think. The difference between then and now is that the tactics are more overt and in your face.

I would also add that the system of global wage arbitrage, and the creation and adoption of technologies to foster higher productivity and efficiency, as well as having the dollar as the world's reserve currency - especially in petroleum transactions has masked an otherwise GARGANTUAN inflationary environment for the American Consumer.

What are the unintended consequences of global wage arbitrage and production efficiencies? Productive employment suffers. To create the same amount of Steel it took 70+ years ago with 300+ thousand people, today you only need 75 thousand people. That's just one example of many.

So, with all these productive efficiencies and global wage arbitrage, where did all the new jobs come from these past 20 years? High tech and the FIRE sector.

BUT... remember, high tech jobs are only created inasmuch as they are cheaper than using the old technology that required MORE people. You don't go high tech unless there is a corresponding decrease in payroll, or a benefit of growth for your product or service. High Tech must pay for itself and then some. And don't forget the high tech overshoot of jobs in the 90s. A lot of that was fluff. Some techie sitting on an aeron chair in San Fransisco making millions from VC $$$ lamely selling dog biscuits online is not the most rational thing. It won't last either. Oh wait, it didn't.

As for the FIRE sector - it's plain to see that it's getting decimated. It relied on a debt driven asset based economy fueled by a fiat monetary system that has now reached critical mass.

So what's the result? Well, I already explained my views on a monetary reset (I'm guessing anywhere from next week to twenty yeasr) But as for employment - the more a society increases productivity, the more unemployment it will ultimately have. Expect the percentage of useless eaters in society to flourish. We have gone thru an employable population overshoot.

Many people should begin to reacquaint themselves with their extended families. The new normal will be multigenerational families under one roof. Just like in the third world - and you know what? That may not be such a bad thing.

 

[ElCubano]

Quote from Misthos:


Many people should begin to reacquaint themselves with their extended families. The new normal will be multigenerational families under one roof. Just like in the third world - and you know what? That may not be such a bad thing.

looks like this might be our best case scenerio, once the house really comes down it might be a bit more chaotic than just moving back with Papi. Something like Mad Max maybe.

 

[Daal]

Debt as a % of GDP is just one measure of leverage and its quite imperfect. That is because it doesnt look at the other side of the balance sheet, assets. They ALSO have gone up a lot from 1950, this provides a cushion for economic agents to be able to support debt(dividends, rents, capital gains, interest income)

Debt HAS rising more then assets but the degree of levering has been smaller than what debt as % of GDP suggests, which is why the scaremongers wont tell you about it

 

[Misthos]

Quote from Daal:

Debt as a % of GDP is just one measure of leverage and its quite imperfect. That is because it doesnt look at the other side of the balance sheet, assets. They ALSO have gone up a lot from 1950, this provides a cushion for economic agents to be able to support debt(dividends, rents, capital gains, interest income)

Debt HAS rising more then assets but the degree of levering has been smaller than what debt as % of GDP suggests, which is why the scaremongers wont tell you about it

Excuse me, but how did those assets increase in value so much these past few years? Let me give you a hint - mortgages are DEBTS, and they were given out like candy.

Thus, asset inflation does not necessarily beget a "cushion" if that asset inflation relies on an overindebted market.

Easy credit - hence, the property BUBBLE. no scaremongering here btw, just the reporting of facts.


Anyway, here are some visuals:

Nothing to see here folks... all's good. And by the way, the chart above is old - we have surpassed the 375% mark.

And here's something from Denninger. Yes, sometimes he goes off the deep end, but this chart is still useful:

 

[Daal]

Quote from Misthos:

Excuse me, but how did those assets increase in value so much these past few years?

Sure, handpick a few bubble years from the 60 year sample I mentioned and use that as evidence

 

[Misthos]

Quote from Daal:

Sure, handpick a few bubble years from the 60 year sample I mentioned and use that as evidence

But those are the years that matter - those are the beginning of the final years of this monetary system. It was during those bubble years that the GDP/DEBT disparity grew ever wider. And you know why? There is a trend, and not a good one at that. Look at the charts above.

Is it sustainable? Why does more debt produce less GDP? And how is that debt going to be supported as corporate profits, personal incomes, and government revenues diminish? What is going on here?

 

[m22au]

What is TFP?

Quote from Martinghoul:


As to your last point, hasn't this Malthusian-type argument been refuted time and time again? Simplistically, couldn't one argue that there's no upper bound on TFP, which means that there's no upper bound on GDP growth, even if resources are finite?

 

[Daal]

Quote from Misthos:

But those are the years that matter - those are the beginning of the final years of this monetary system. It was during those bubble years that the GDP/DEBT disparity grew ever wider. And you know why? There is a trend, and not a good one at that. Look at the charts above.

Is it sustainable? Why does more debt produce less GDP? And how is that debt going to be supported as corporate profits, personal incomes, and government revenues diminish? What is going on here?

There is a limit of how high it can go of course and people went too far too fast in both asset and debt markets, that was a mistake and people are now correcting that.

But there is nothing bad about leverage, its a matter of how much. That is unless you dont believe in capitalism and that people will allocate savings correctly on net over the long-run even in the presence of a central bank and declining purchasing power of the currency(which is the historical record)

 

[Misthos]

Quote from m22au:

What is TFP?

Total Factor Productivity - http://en.wikipedia.org/wiki/Total_factor_productivity

You mentioned Chris Martenson earlier - yes I have reviewed some of his crash course chapters. I also have read Albert Bartlett... and follow Marc Faber too.

Al Bartlett is a physicist and a Malthusian and he has this challenge:

"Can you think of any problem in any area of human endeavor on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?"

 

[m22au]

Yes I enjoyed Bartlett's lecture on exponential growth.

For those who haven't seen it, part 1 of 8 is here:
http://www.youtube.com/watch?v=F-QA2rkpBSY

Quote from Misthos:

Total Factor Productivity - http://en.wikipedia.org/wiki/Total_factor_productivity

You mentioned Chris Martenson earlier - yes I have reviewed some of his crash course chapters. I also have read Albert Bartlett... and follow Marc Faber too.

Al Bartlett is a physicist and a Malthusian and he has this challenge:

"Can you think of any problem in any area of human endeavor on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?"