“Macro” Musings II

[giofranchi]

it seems deflation is not really an option with all that debt.

 

Why not? It is either restructuring of the debt or (hyper)inflating it away.

Inflation is not an option because you simply cannot inflate away so much debt.

Instead, when you restructure debt, deflation just follows.

 

Gio

[JEast]

It is my understanding that debt rarely gets repaid, it is just refinanced. 

 

The question on the table is what will be the mechanism of the refinance  :-\

[petec]

it seems deflation is not really an option with all that debt. Isn't it possible to have a controlled delevering like Dalio suggested? Also meanwhile productivity is still rising...

 

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 ;)

[giofranchi]

It is my understanding that debt rarely gets repaid, it is just refinanced. 

 

True. Usually wars were needed to restructure debts, bringing them down to acceptable levels and starting a new expansion cycle. Absent a war? Like we all hope is the case this time? Well, total debts in western countries might come to be as large as in Japan… I highly doubt with different results: deflation anyway.

 

Gio

 

[yadayada]

I guess more important then ever to invest in things that provide necessities of life with a low cost advantage, and not luxury products.

[KCLarkin]

I normally ignore Macro, but I found this episode of Wealthtrack very interesting:

http://wealthtrack.com/recent-programs/trahan-still-bullish/

 

The guest is Francois Trahan. Among other things, he predicted we would see 1.x% bond yields in Q4 (which we have).

[frommi]

Deleveraging in the us is in full progress when i remember the paper that was posted here last week correctly. Japan is on a good way with higher taxations and printing money at the same time. I am pretty sure this will work out very well over the next decades. Europe is the one without strategy and hope and china is a massive problem right now, i doubt that we will ever see growth rates above 7% there. India and africa are in my eyes the players where i have the most hope that they can create the next worldwide boom.

 

Btw. looks like the US is now deleveraging via margin calls, too. :D

[Packer16]

It is my understanding that debt rarely gets repaid, it is just refinanced. 

 

True. Usually wars were needed to restructure debts, bringing them down to acceptable levels and starting a new expansion cycle. Absent a war? Like we all hope is the case this time? Well, total debts in western countries might come to be as large as in Japan… I highly doubt with different results: deflation anyway.

 

Gio

 

We may have both.  Real deflation in goods and wages but nominal inflation in prices and assets as the monetary base grows.

 

Packer 

[yadayada]

http://www.econdataus.com/fedbal.html

 

Weren't these mbs mostly worthless

 

Also  does the m2 money supply include the fed's balance sheet ?

 

Finally it is interesting that money velocity has plummeted

[petec]

Deleveraging in the us is in full progress

 

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.

[giofranchi]

Deleveraging in the us is in full progress

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 

 

[petec]

Deleveraging in the us is in full progress

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.

[giofranchi]

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.

 

Me neither... ::)

 

Gio

[petec]

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.

 

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.

[frommi]

Deleveraging in the us is in full progress

 

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.

[petec]

Deleveraging in the us is in full progress

 

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."

[yadayada]

yeah but money supply is 11.5 trillion. Fed balance sheet went from 1 trillion to 5 trillion. But 1.5 trillion of that were Mortgage backed securities that were mostly worthless.

 

So technically it increased from 1 to 3.5 trillion, by 2.5 trillion. So compared to 11.5 trillion it is not that much.

 

Also looking at M2 money velocity, it went down to like 30 year lows:

http://research.stlouisfed.org/fred2/series/M2V

 

Seems like the increased amount of money was just invested in low yield things and is sitting in people's accounts? So this is why you saw no inflation.

 

So how in this picture do you get hyperinflation? They would have to print an insane amount of money over the next years.

 

Also isn't some level of debt sustainable? Like mortgages for example. Monthly payments basicly replaces rent. So you don't need to see a deleveraging of mortgages. And that is the largest part of consumer debt. You either pay 1200$ a month in rent or in mortgage payments...

 

http://www.zerohedge.com/sites/default/files/images/Household%20Debt%207.31.09.jpg

 

As you see the non productive 'waste' debt has not increased much and is only a small part.

 

Same with some level of student debt. 20k$  of debt per student on average seems normal. So if you have 50 million students with an average debt of 20k$ then that is 1 trillion $. In theory this debt should help a country become more productive. This is also tracking inflation basicly and can be paid off over long periods of time.

 

 

[frommi]

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."

 

There were already plans for this i think it was at the start of 2013 where the us had these budget problems. The US is printing money since more than 100 years, has the US ever encountered hyperinflation? German hyperinflation had to do with debt repayments that where not in its own currency. Comparable with argentinas situation, but never with the US.

[petec]

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.

[yadayada]

Pete, agree with you on the london thing. But on average, especially in the US, mortgage debt is probably productive.

 

Also what do you mean by the government stimulating the economy? Not contesting it or anything. Is this by hiring more public servants that are not productive? Because the Fed is basicly creating money to stimulate already, this is not really the government right? They are doing it to prevent deflation and make the deleveraging process more smooth.

 

You can make an argument for that. Because if you don't have a smooth deleveraging a lot of value can  be destroyed. There is no money for science projects, expansion and increasing of productivity.

 

As for GDP, that is basicly what everyone spends in an economy right? So if productivity goes up, GDP does not necesairily go up much? If you have a mini economy. 5 people produce something and sell that to eachother 5 times in a period for 100$ each, then gdp is 500$. But if it costs less to  make, gdp goes down basicly. Because they now only have to pay each other 80$.  so now gdp is 400$.  If you keep printing money though, it will feel like things are not getting cheaper despite increasing productivity. And there is probably more tax revenu if a government borrowed against this.

 

I feel like im out of my dept now though, gotta study this some more.

[petec]

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 ;)

[petec]

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.

 

[yadayada]

http://www.businessweek.com/articles/2013-08-08/the-shrinking-federal-deficit-hurts-a-gop-argument

 

It seems the budget deficit is shrinking. This is kinda disturbing though:

https://static.nationalpriorities.org/images/fb101/2014/presidents-proposed-discretionary-spending.png

 

It seems this can be easily fixed by putting a knife in the military budget? It seems with the massive debt outstanding it would be better to run a surplus for a while. And removing some R&D money and taking some of the military bases from europe could be a good start.

 

Also this:

http://1.bp.blogspot.com/-qGmmVhZXlMg/UwOp7ySZ1zI/AAAAAAAAY7Q/5jaLRzvghDs/s1600/Household+Debt+2013Q4A.png

 

Does look like deleveraging. But it looks like student debt is about to go in a bubble. I don't see autoloan debt ballooning really.

[treasurehunt]

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 ;)

 

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.

[giofranchi]

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.

 

Yeah! I agree with you 100%. But this faith in human ingenuity shouldn’t prevent you from seeing the truth.

Einstein once said:

We cannot solve problems by using the same kind of thinking we used when we created them.

So, let me ask you:

How is all this printing of money and increasing of public debt supposed to solve a debt accumulation problem that started 60 years ago? In other words, to solve a debt problem with even more debt is all that human ingenuity can conceive? ???

 

Gio