petec

Yes and no. 1952 was the trough for US total debt/gdp. Then went up for a couple of decades, flatlined for a couple, and accelerated again in the '80's until the peak in 2009. Now falling, but still very high. PW has the graph in his Fairfax presentations. NB this doesn't include the PV of future unfunded liabilities, because governments don't hold themselves accountable in GAAP terms. The discrepancy is presumably in the bond market which I believe has grown much faster than GDP as banks got disintermediated. So the lenders then are pension funds and all the other bond buyers. More importantly (for me) why worry who's lending? The data are there and aren't disputed, and the implications of brought-forward consumption on GDP comps are the same regardless.

What about bonds? No, the Fed doesn't *directly* control bank lending. It can influence it through the mechanisms you describe, but it can't force banks to lend and therefore it can't force money and credit multiplication via the fractional reserve system. If it could, it wouldn't have to go to such extreme lengths to get credit flowing in the economy.

On the positive side, oil and commodities in general are going to be very good for the consumer (providing the Fed doesn't over-react to 'deflation' worries and print and push them back up again).

No, I am very aware of the importance of the distinction. But: 1. As I've argued before, the 'mortgage replaces rent' argument is partly false: debt drives bubbles, while rent doesn't; and if you lose your job and your house value falls (two events that are usually correlated) you still have the mortgage. Debt makes economies far more volatile than rent does (hence the term leverage!). 2. Much consumer debt - even mortgage debt - ended up in consumption and that creates a very difficult 'comp' for GDP. Borrowing to consume is, by definition, borrowing to consume now at the expense of consumption later. Unless you keep adding debt at an ever - accelerating pace, or you have a positive step-change in productivity, GDP *must* slow at some point after years of borrowing to consume. I think that's as close to a mathematical certainty as you get in the dismal science. But the Fed consistently over-projects GDP growth at the moment and presumably others do too, which might make future tax projections inaccurate. 3. The affordability of consumer debt is affected by consumer expectations of future taxes and costs. Thus, consumer spending might slow as government debt rises and will surely slow if it turns out that the government can't afford its unfunded promises to cover healthcare, pensions, and other benefits in the future. So the two are distinctly connected. I'm also un-nerved by any bull case that relies on there being a 'sensible' President ;) I'm only partly being facetious: why would a population that arguably hasn't elected a good President since Eisenhower (Reagan talked a good fiscal game but didn't deliver) elect a sensible one *before* a crisis that proved the need? Fingers crossed, but I won't hold my breath. (Edit: Clinton wasn't bad.) However I do completely agree that there won't be a hyperinflation. I only brought that up in response to a poster who (I thought) suggested that the solution to all this was the Fed printing and cancelling the bonds they bought as a result. Eventually that will lead to a loss of confidence in the currency. But I don't expect it to happen. I basically agree with you: I think there will be a long period of difficult growth and de-leveraging. I just expect that to be a very volatile period.

An increase in the money supply multiplied by fractional reserve banking, operating over 60 years.

Some slightly disjointed thoughts: 1. Lending comes from savers. So pension funds etc. invest in bonds. This is fine so long as the lending is money good, and disastrous when it's not. Top the extent that QE forces pensioners into risker investments at bad prices it's dangerous. 2. Lending comes from the Fed. If the government issues a new bond and the Fed buys it with newly printed money, a technical liability is created albeit one that will likely never be repaid. 3. Lending comes from fractional reserve banking. A loan immediately creates a deposit; subtract the reserve fraction and the deposit can be re-leant; and this can be repeated again and again. Credit can beget credit and credit can pile up hugely. This is why in a fractional reserve banking system the Fed can't directly control money creation or velocity.

There's that, but there's also: is it productive lending? There's a huge difference between taking out a mortgage to start a business that more than pays off the mortgage, and taking out a mortgage to bring tomorrow's consumption forward to today. One grows GDP sustainably, one doesn't.

Not at all. Just look at the picture in attachment: personal savings have rarely been as low as today. Gio Plus, the 'asset' disappears if the borrower defaults or inflates away the debt. For me using this argument to justify really high debt loads (as opposed to normal ones) is really dangerous nonsense ;) No offence intended by the strong wording.

What I meant is that humanity has already dealt with the problem of too much debt many and many times in the past. And though we all associate nowadays the printing of money and the increasing of public debt with Keynesian economics, it is actually how humanity has dealt with the problem of too much debt at least since the days of the Roman Empire (during which I know of many instances when debasement of the currency and the issuing of public debt were employed). And the outcome as always been the same: slow or no growth for many years, asset bubbles followed by sudden crashes, generally difficult economic environments. I simply don’t understand how, by repeating what has already done many times in the past, we should now expect a different outcome… ??? Gio Too much debt many times in the past... outcome has always been the same... slow or no growth for many years... Gio, How fast was the growth rate after WWII? Consumer debt/gdp reached its lowest level since records began in 1945 because the public spent the war years lending to the government. Federal debt hit its all-time record if you exclude unfunded liabilities but if you include those was way below today's levels. Total debt/GDP was hugely down from the bubble-bust years and by 1952 was at its second-lowest-ever levels. So yes, the 1950's was a great decade, because the newly-confident nation went on a spending-and-inventing binge and started what turned out to be a 60-year re-leveraging. Today, the consumer has delivered a bit from record levels but consumer debt/gdp is still 3 times what it was at the end of WW2, leaving the consumer so indebted as to be bankrupt under normalised interest levels. The government is also at historically high levels and rising. The nation isn't filled with the confidence that comes from winning a hell of a war against pure evil. It's still inventing a lot but the spoils are going to about five people because of bad government policy. I genuinely hope you are right, but the 1950's experience does not disprove Gio's thesis.

My experience is that the pessimists are almost always more persuasive than the optimists. My theory is that pessimism is easily supported by a coherent narrative that shows a path to disaster, but optimism often requires belief in the ability of human ingenuity to solve problems in ways that are not obvious in the present. And I am not just talking about economics; peak oil, the long-term effects of climate change, Malthusian predictions of overpopulation etc are also examples. Of course sometimes the pessimists are right. But in general, I would discount predictions of doom quite heavily. I’ve heard others claim that pessimists are always more persuasive. Maybe it’s true. But I’ve always found people don’t like to hear the truth if it’s not good for them, especially if it means they have to change behaviour they enjoy. Don’t forget that bubbles are often driven by *optimism*. Remember the internet was going to change the world? I find history a useful sanity-checker. I’ve got a (now old) degree in a climate-related subject and have an understanding of how volatile climate is over the long term. As a result I’m not convinced that current climate change is either anthropogenic or disastrous, although the jury’s out on both. I was an oil analyst in 2004-8 and did a lot of work on peak oil and was never convinced (in fact I think we’ll stop needing oil before we run out). I’ve also done a lot of work on agriculture and don’t believe food shortages will be a serious problem (although environmental damage from more intensive farming might be). In other words, I’m not a natural pessimist. I actually get pretty irritated with people who believe any of these things without having studied them seriously. I’m a huge believer in human ingenuity. Unfortunately history is full of examples of debts on this scale leading to slow growth, inequality, and even depressions or hyperinflations. It is full of examples of people saying, well, of course, we know how to run the economy better these days so it won’t happen. It’s *not* full of large-scale national success stories in countries that think printing money to borrow, rather than hard work, is the way to create wealth. The US got out of the great depression because, during the war, it worked bloody hard and saved like stink, so that the consumer was insanely under-leveraged by the end of the war. It’s currently doing neither. I think the future of humanity is rather bright. I just think there’s going to be some economic hardship on the way.

I should also say: I think money printing raises the price of assets and commodities, making life and saving a shed-load more expensive; but it doesn't raise demand and therefore wages partly because low rates actually suppresses the purchasing power of anyone with savings. It therefore might be exactly what the economy doesn't need. It is *possible* that a period of deflation of basic commodities (oil, food, metals) driven by a period of low demand because people were saving might have gotten us to a place where people had money to spend and assets were cheap enough for them to want to do it. In other words, free markets might have cleared. That didn't happen in the great depression because demand fell and that drove wages down and that meant people could not save so they cut spending even more. It was a vicious circle. But the US now is different to the US then in a thousand ways, not least that the US then was the world's factory and the demand that kept falling was European demand. In other words, the US then is equivalent to China now. The US economy now is much more self-sustaining, and is more akin to the European economy of the 1930's which didn't suffer nearly so much in the GD. So, policies (QE) designed by a GD student (Bernanke) to stop a repeat of the GD might be inappropriate.

Interesting - mortgage debt may well be productive now. Clearly in 2006 much of it wasn't. The % of auto loans that are subprime is back at a record though so my guess is at least some consumer debt isn't. And mortgage debt definitely wouldn't be at 5-6% interest. I'm not sure how important that is: clearly we aren't going back there soon but that *is* normal and healthy and houses won't be good investments on the way there imho. Government stimulus: I'm referring to continually running deficits. The macro argument for deficits in a recession is that they stimulate demand, which should kick-start GDP growth, which should raise the tax take so that the deficit goes away. The US has been running record deficits and has the least rapid recovery ever to show for it. There is good evidence that above total debt/gdp of 250%, growth slows anyway, so it is possible that $1 of deficit debt does not add $1 of gdp, which means we're in trouble. That said, the deficit has been reducing and if it continues to do so maybe it's all fine. I wonder - lots of the growth and employment has been the shale boom and have you seen the oil price recently? The Fed is also stimulating by lowering interest rates, partly to stave off deflation. The issues, again, is I am not sure the evidence says this works. A debt-deflationary spiral is a nightmare, sure, but money printing benefits the rich (Wall St) at the expense of the poor and I don't think it helps the real economy. In the mean time, low rates encourages lots of unproductive debt. That could be a bad combination eventually. I'm totally out of my depth too, as is everyone, including the experts on both sides of the debate. No-one really knows but I just find the pessimists more persuasive than the optimists, based on my reading of history. I hope I am wrong, but I think we are in for years of sub-par growth and volatility and eventually there will be a depression or a significant period of inflation or one followed by the other. That said I'm not a canned food and guns man ;)

Yadayada: totally agree with most of what you've said. I don't think the US is equivalent to Weimar and I don't expect a hyperinflation. What I do think is that the idea that printing money to pay debt is, eventually, inflationary. And inflationary in the bad sense (collapse of confidence in the currency) not the good sense (demand bumps up against capacity, pushing prices up and creating an incentive to invest). Where I perhaps disagree is that mortgage interest replaces rent. That's a fair statement to make when interest rates are roughly normal, but I think when they are way below normal and mortgage interest is still as big as rent (or bigger, as is the case for me in London now), it's very easy to argue that that is non-productive debt that might well ultimately lead to capital loss. Overall you might divide debt into 3 types: 1) the type that replaces other expenditure (mortgages, great idea if house prices are not overextended, non-productive if they are); 2) the type that builds new assets (great idea of the assets pay for themselves, not if not); and 3) the type tat brings tomorrow's consumption forward to today, thus depressing tomorrow's consumption. Look round the world and you'll find a lot of examples of good debt...and a lot of examples of bad debt. One example (I would suggest) of bad debt is the debt the US government keeps building up to 'stimulate' the economy which resolutely refuses to be stimulated, so that tax revenues aren't rising fast enough to start paying off the debt. Frommi: I don't think Weimar's issue was that the debt was foreign currency denominated. They were printing their own currency, and it ended up depreciating so fast that printing it didn't help repay the war reparations. The problem was bad policy.

How so? Total nonfinancial debt/GDP went from 344% to 350% in six months from 3Q13 to 1Q14 National debt is up from $11th to $18th in six years. Yes, leverage is being transferred from individuals to the state and that buys some time because the state can pay lower rates. But this can't be classed as de-leveraging unless, eventually, the deficit falls or GDP accelerates such that debt/gdp falls. Unfortunately we seem to be stuck in a rut where lower deficits kills GDP growth. But I'd love to know which paper you're referring to. I was referring to the paper in this thread: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/deleveraging-what-deleveraging/msg190809/#msg190809 From my understanding a part of the deleveraging process is that household/corporate debt goes to the government and is then partly bought from the FED, where it gets nullified as money printed. Of course this whole process will take decades to finish. I just have a limited understanding of all this, but in theory all the debt the government has that is already bought by the FED can be cancelled with one swipe (or a billion dollar coin pressed by the government). When you think about this, the US is not in bad shape currently, because it has all levers in its hand. Where as in the EU this is simply not possible, because the government and the central bank are not working together and are based on rules that where made in good times, where this scenario was not even thought of. The government can't do that without causing a loss of faith in the world's reserve currency, which would be good for no-one. It's a bit like arguing Germany was 'not in bad shape' before it became the Weimar Republic. I'm not arguing the current situation is as bad, but Bernanke's helicopter has been tried: Weimar printing presses trucked money to companies every week to pay staff, who were then given an hour off to spend it before it became worthless. Admittedly the debt was inflated away, but it wasn't much fun. Ludwig von Mises: "the final outcome of credit expansion is general impoverishment."

You are perfectly right, and I think MKL might be a wonderful choice! ;) The only thing I can tell you is I have a great deal of respect for Einhorn. On the contrary, I cannot muster the same confidence in anyone running MKL today. Of course, they might be a great team, instead of a great entrepreneur… but let's just say I think I understand great entrepreneurs better than I understand great teams! Regarding GLRE insurance underwriting I think they are very conservative. They write almost only high frequency – low severity contracts, and rarely get involved in writing catastrophe policies. They are building some float, but not in a hurry. And today are still very much unlevered. They have already proven to be able to reduce their business, when rates are not satisfactory enough. I also think that if Bart Hedges is good enough for Einhorn, he might be someone who deserves trust. :) Gio Gio, a question for you: investing in a key man entails key man risk; investing in a great team arguably does not. You must have some very good reasons for preferring key men despite the risk, especially on this thread which is explicitly a 10-year view (during which time your key man could get bored, or fall under a bus). So could you explain a bit more? Thanks :)

Me neither... ::) Gio It occurs to me also that measuring vs. GDP may be the wrong thing to do. As I read it, wealth has fallen for >90% of people since the crisis, so their leverage relative to wealth and what they can repay might actually be rising even though their leverage relative to gdp is falling.

How so? Total nonfinancial debt/GDP went from 344% to 350% in six months from 3Q13 to 1Q14 The number for aggregate debt in the US in the latest Hoisington market commentary is 334% GDP. While it reached a peak of 360% GDP. A long way to deleverage, but seemingly on the right track... Instead the EU and Japan are not on the right track: for the EU aggregate debt is 460% GDP, and for Japan it is 655% GDP. ::) Gio Yeah I just read that. My figures either came from Jim Grant, Fred Hickey, or Marc Faber. No idea why they are different, but I find it *very* hard to believe that the private sector has delivered by $7tn, which as I understand it is what is needed to offset additional public sector debt. We know some mortgages have been restructured, but apart from that student debt has exploded, auto loans are back to 31% sub-prime which suggests to me that lending is easy and loans growing, companies have increased net debt according to the stats I see... I agree that the US is in a better place than EU/Japan/China, but whether it has delivered to any significant extent, and whether it is going in the right direction, I am not so sure.

I certainly would not have been among them! I do totally agree about small private niches though, have been slowly ramping up research into this. My list: FFH/BRK/MKL KO/PEP/DGE/PG/ULVR/NESN MSFT/MMM/TSCO/ITUB

How so? Total nonfinancial debt/GDP went from 344% to 350% in six months from 3Q13 to 1Q14 National debt is up from $11th to $18th in six years. Yes, leverage is being transferred from individuals to the state and that buys some time because the state can pay lower rates. But this can't be classed as de-leveraging unless, eventually, the deficit falls or GDP accelerates such that debt/gdp falls. Unfortunately we seem to be stuck in a rut where lower deficits kills GDP growth. But I'd love to know which paper you're referring to.

"Plan A failed." "Let's do more of plan A." Oh good.

Why did revenues and profits shrink so much in 2013? (I am being lazy here before doing my own research, sorry.)

Surely the only way you can have a controlled delivering is if GDP grows faster than debt in absolute terms such that the debt/GDP ratio falls. The problem with that is that debt bubbles tend to lead to capital misallocations such that the debt doesn't drive GDP. Thus, GDP remains slow and debt is rising. That's not a deleveraging ;)

I wouldn’t presume to have any clue about what’s coming after the developed countries debt problem is finally solved… But, until it is solved I see only two possibilities: deflation or hyper-inflation. Gio I'm not talking about afterwards, my point is that I think the solution will include both.

China accounted for 40% of world money creation 2009-12. Since 2012, PPI has fallen for 31 consecutive months. Not saying you're wrong, but I'm not sure that monetary inflation necessarily ends up in PPI or CPI. It ends up in assets. The end of a debt super-cycle is reached in two ways that I know of: deflation or hyper-inflation. Anything else just kicks the can down the road. The debt super-cycle we have lived through until now is the largest accumulation of debt in human history. Therefore, it is only logical that its consequences will be at least as extreme as in the past. Imo the question here is not if inflation is a monetary phenomenon, the question is if hyper-inflation is a monetary phenomenon… And the answer is: yes, surely! Those people who will be in charge of monetary policies in western developed countries might have only two choices in the near future: either accept a deflationary scenario, or destroy paper currencies. After all that’s what Von Mises said, isn’t it? No need to invent anything new. I don’t think they will decide to render paper currency totally worthless, and that’s why I think a deflationary scare might be the most likely outcome. Gio For me I keep coming back to something Sam Mitchell said at a dinner before the 2009 Fairfax AGM. Asked whether he believed in deflation or inflation he said: both, and what you need to focus on is when deflation turns into inflation. Deflation scare, debase, inflation.

China accounted for 40% of world money creation 2009-12. Since 2012, PPI has fallen for 31 consecutive months. Not saying you're wrong, but I'm not sure that monetary inflation necessarily ends up in PPI or CPI. It ends up in assets.