“Macro” Musings II

[frommi]

Gio looking only at debt is looking at only one side of the equotation. Debt/GDP is what should matter, and when you can take on more debt that boosts GDP even more, than yes more debt can solve the problem. The only other solution is a default, but what do you think would happen when the US would do that?

As long as real yields stay negative for a very long time we get the necessary deleveraging, so the US is right on track.

Europe currently is not and when this continues will lead to further debt defaults in europe, which is stupid. We could simply do the same as the US/UK and win in the end. But our political leaders are to stubborn to understand that and i doubt that if Merkel/Schäuble stay at the helm that the problems in europe ever gets solved. The current nearing deflation in europe is just a logical consequence of the austerity policy. (And debt/GDP levels in europe are now even higher as before the last crisis.)

[giofranchi]

frommi,

just read the latest by Hoisington: more debt is now decreasing GDP, not boosting it! And the only effect of printing money is to spread the pain over decades, instead of concentrating it in just a few years. It might be the right choice, I don’t know… If you concentrate the pain in a few years you get the Great Depression, if you spread it over some decades you get Japan… Which is better?

Europe imo is getting the worst of both worlds because of the Euro. Europe cannot print and cannot default… Therefore, it is running the risk of suffering acute pain for decades! ::)

 

Gio

 

[frommi]

Europe cannot print and cannot default… Therefore, it is running the risk of suffering acute pain for decades! ::)

 

Ha, just as i read it, do we both suffer from home bias pessimism?  ;D

Are the americans in this forum worried about the us more than the eu?

[yadayada]

The American public went through delevering the past 5 years. And it seems the us government can easily cut spending in the military and still have a massive army. So whe us public levers up again and some of that pent up demand is released they have more tax income and hopefully a smart president that cuts some waste.

[giofranchi]

Ha, just as i read it, do we both suffer from home bias pessimism?  ;D

 

I don’t think I suffer from a “home bias pessimism” if I say:

1) The macro situation in Europe and Japan is very worrisome;

2) The macro situation in the US is difficult, but better than in Europe and Japan;

3) The macro situation in China is one of unprecedented excesses, and therefore at least as worrisome as 1 and 2;

4) I remain bullish on good businesses, purchased at good prices, and led by good entrepreneurs who will behave flexibly enough and deal successfully with any kind of storm that might come our way.

I think I am being realistic. Neither too pessimistic, nor too optimistic. If 1, 2, 3, and 4 are not true, I welcome anyone to show me some contrary evidence.

 

Gio

 

[treasurehunt]

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

 

Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

[yadayada]

During FY2013, the federal government collected approximately $2.77 trillion in tax revenue, up $326 billion or 13% versus FY2012 revenues of $2.45 trillion. Primary receipt categories included individual income taxes ($1,316B or 47%), Social Security/Social Insurance taxes ($948B or 34%), and corporate taxes ($274B or 10%). Other revenue types included excise, estate and gift taxes. Revenues rose across all categories in FY2013 versus FY2012 as tax cuts expired and the economy improved.[9]

 

FY2013 revenues were 16.7% GDP, versus 15.2% GDP in FY2012.[9] Tax revenues averaged approximately 18.3% of gross domestic product (GDP) over the 1970-2009 period, generally ranging plus or minus 2% from that level. Tax revenues are significantly affected by the economy. Recessions typically reduce government tax collections as economic activity slows. For example, tax revenues declined from $2.5 trillion in 2008 to $2.1 trillion in 2009, and remained at that level in 2010. From 2008 to 2009, individual income taxes declined 20%, while corporate taxes declined 50%. At 15.1% of GDP, the 2009 and 2010 collections were the lowest level of the past 50 years.

 

Budget deficit was 700 billion in 2013 and shrinking. so if GDP grows a few years, it is probably 19 trillion. And then you get 3.4 billion in tax income. if budget does not grow by then, the deficit is gone.

 

And there is probably a lot of waste. So I seriously doubt we see hyperinflation before some sensible budget cuts (almost 700 billion to the military??!) . Given that a lot of government spending does not add much value, I think that is a good thing.

 

Even if inflation is ramped up a bit, then GDP grows faster, debt is worth less, and deficit is gone in no time with some sensible leaders. By that time the non government part of the US is done deleveraging, so that fills up the gap.

http://constantgeography.files.wordpress.com/2011/02/budgetchart1981_2007.png

 

So if governemnt cuts out some fat, things turn up again, they could have a 3-400 billion surplus. do that 8 years and debt gets back to 2000 levels, probably lower since inflation.

[giofranchi]

Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

 

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

 

[ERICOPOLY]

Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

 

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?

 

[giofranchi]

Gio,

How fast was the growth rate after WWII?

 

In the US:

1950s, 4.3%

1960s, 4.5%

1970s, 3.4%

1980s, 3.1%

1990s, 3.2%

from 2000 to 2012 1.7%

 

Gio

[yadayada]

To be honest the crisis is not to blame on money printing... Just look at Japan, bubble with massive crash and then deflation resulting in a slow and shitty economy for over a decade. The bubble is to be blamed on insured bank deposits and a completely idiotic and irresponsible government wanting everyone to have houses and making laws to facilitate that. Can't really blame banks that much here.

 

 

The moment you insure bank deposits you gotta guarantee them and that requires strict regulation. The money printing is what happens when it all goes wrong, but is not the instigator imo.  The weakness here is really stupid or crooked politicians.

[ERICOPOLY]

Gio,

How fast was the growth rate after WWII?

 

In the US:

1950s, 4.3%

1960s, 4.5%

1970s, 3.4%

1980s, 3.1%

1990s, 3.2%

from 2000 to 2012 1.7%

 

Gio

 

That growth looks solid to me.

 

Yet that was a period of very high debt load after WWII.

 

So it refutes your point, doesn't it?

[jb85]

Gio,

How fast was the growth rate after WWII?

 

In the US:

1950s, 4.3%

1960s, 4.5%

1970s, 3.4%

1980s, 3.1%

1990s, 3.2%

from 2000 to 2012 1.7%

 

Gio

 

That growth looks solid to me.

 

Yet that was a period of very high debt load after WWII.

 

So it refutes your point, doesn't it?

 

I haven't followed the whole discussion, but what happens if we look at total credit market debt as a % of GDP?  1950's saw a mild decrease in that ratio followed by significant increases in the following 50 years...

 

http://i.imgur.com/1s0nach.png

 

edit:  point being, at first glance it doesn't look like there was much significant deleveraging (as measured by above graph) during the 1950s and 1960s

[giofranchi]

Gio,

How fast was the growth rate after WWII?

 

In the US:

1950s, 4.3%

1960s, 4.5%

1970s, 3.4%

1980s, 3.1%

1990s, 3.2%

from 2000 to 2012 1.7%

 

Gio

 

That growth looks solid to me.

 

Yet that was a period of very high debt load after WWII.

 

So it refutes your point, doesn't it?

 

US total debt as a percentage of GDP reached 300% in the mid 1930s and after WWII was back down to 130% in the early 1950s.

Then it just kept climbing, until it reached 380% in 2009.

Now the US has delevered a bit and US total debt as a percentage of GDP is at 330%… Still higher than before WWII and during the Great Depression.

Europe and Japan (and probably China too) are even in a worse shape.

 

Gio

 

[prevalou]

Invert : if there is a lot of debt in the system, there is a lot of savings too. For one borrower there has to be one lender.

[giofranchi]

Invert : if there is a lot of debt in the system, there is a lot of savings too. For one borrower there has to be one lender.

 

Not at all. Just look at the picture in attachment: personal savings have rarely been as low as today.

 

Gio

Personal-Saving-Rate-and-Private-Debt-to-GDP-1900-2013.bmp

[petec]

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.

 

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.

 

[petec]

Did anyone -- including the folks printing money and issuing public debt -- actually claim that these actions are supposed to solve "a debt accumulation problem that started 60 years ago"? And why would you imagine that issuing more debt is all that human ingenuity can conceive? Also, my point was not that I know how to solve particular economic problems that affect the world; rather, I was pointing out that a solution may exist even if you or I don't know of one. The fact that intelligent, thoughtful and fairly objective observers like Buffett and Munger cannot see the end game clearly tells me that looking at the current economic scenario through a filter like "more debt cannot solve the problem of too much debt" is way too simplistic. Does anyone even know with reasonable certainty what a safe level of total debt is for a diverse economy like that of the US?

 

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.

 

 

[petec]

Invert : if there is a lot of debt in the system, there is a lot of savings too. For one borrower there has to be one lender.

 

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.

[prevalou]

So, there is too much lending % GDP. I think we can agree on that...The question becomes; who is lending  ? is this careless lending ?

[petec]

So, there is too much lending % GDP. I think we can agree on that...The question becomes; who is lending  ? is this careless lending ?

 

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.

[prevalou]

It is quite strange nobody seems to be able to answer this simple question, if lending is so massive: who is lending ?

 

[giofranchi]

It is quite strange nobody seems to be able to answer this simple question, if lending is so massive: who is lending ?

 

I am just guessing: what about all the money Bernanke and Draghi have printed and used to buy Treasury Bonds and German, French, Spanish, and  Italian bonds? What about all the money they have given to banks, which in turn have lent to businesses and individuals?

 

Gio

 

[prevalou]

thanks for this answer. I am not a macro specialist, but i think the money printed by the fed returns to the FED because banks are fearful or borrowers are fearful.  So there is no net lending there.

[prevalou]

In 2007, Banks had 20.8 B$ deposits at the Fed, at the begining of 2014, 2.6 trillion $ (source JPM 2013 annual letter)