Current Economy

[Guest Cameron]

I think we both were at the same endpoint but have taken different paths to get there.

 

While I don't think GFC was the cause I think QE delayed the inevitable. Had the household deleveraged to the same levels we did following the Great Depression I firmly believe we would be in a immensely better position. It may have been more beneficial to let the firm burn in terms of asset prices, not firms failing, for QE to have the same impact it did in the Great Depression. I don't think we have learned anything and the next recession I feel will ultimately be brought on by some type of panic will just be a replaying of the GFC.

I'm sorry that's just wrong.

 

Without a double blind controlled study it's hard to determine the exact efficacy of a policy. In economics we're not allowed to do that because it would be incredibly inhumane and just flat wrong. About delaying the inevitable I would posit this. Most people that get cancer die of cancer. The treatment and drugs just delay the inevitable. Should we not administer treatment and drugs? Yea I know it's not a fair comparison. But the Fed administers monetary policy -  QE is a monetary policy tool. The problems of income and wealth inequality preceded the GFC and were not caused by monetary policy. Monetary policy won't solve them. But like cancer medicine it may help the patient along.

 

Furthermore you say that if we had deleveraging like the Great Depression we'd be in a better place. That is absurd. That last thing you want to have is deleveraging in a depressed economy. That is disastrous. If you had deleveraging like the Great Depression we wouldn't be where we are. We'd be in 1933. Where we are may not be perfect but nobody would trade this for 1933. The firm would not be burning because of asset prices, the firm would be burning because it has no business. Hoping for a replay of the Great Depression to decrease income inequality while it would work mathematically is insane.

 

I mistyped, firm should be fire. Its late.

 

Its not the level of deleveraging, its the way its handled, I don't think this one was handled as well as others feel. The British deleveraged with the same type of depressed economy just fine in the 1940s

[rukawa]

That was provided in my original post, I have no problem creating a report if that would make my argument more valid.

 

My comment was not directed specifically at you. Its more of a general argument. Keynes wrote Economic consequences of the peace. A lot of it is qualitative but there is a straightforward quantitative argument where he basically demonstrates that it will be impossible for Germany to meet its treaty obligations.

 

You included various graphs and numbers in your initial post but what I am getting at is that we need some argument that connects the numbers to some unassailable conclusion. Its not necessarily the case that any such argument can even be made. It could be that we are in a situation that doesn't necessarily need to lead to any particular conclusion. Unlike the subprime crisis or the Treaty of Versailles. My view is that for macro to be valuable it needs to provide us with, in at least some particular case, a prediction that we can rely on.

 

Let me try....

 

US household debt is 80% of GDP. GDP is 18 trillion, number of households is 128 million...so I get something like 150K debt per household. Assuming interest costs of 5%, we get $7500 per year interest service costs. Median household income is about 60k. To me this appears reasonable. Most US households should be able to handle this. Your initial post had I think even lower servicing costs...10% of DI which seems pretty low to me. So as far as I can see there is no problem here. I think i would be scared at around 30% of DI.

 

Now corporations. They have 6 trillion in debt. Well what are their total profits? 1.6 trillion. Again if we assume 5% interest servicing then we get 300 billion which is 18% of their net income. This number is big enough that I doubt corporations could continue their buybacks at the same levels but I still think they should not have a problem paying the debt off.

 

[Cigarbutt]

Comments about debt service ratios are valid points.

In a way, maybe we are no where near the thresholds that the likes of Reinhart and Rogoff have tried to describe.

 

However debt service ratios are lagging indicators.

So count me in the skeptics.

Bias disclosure: if stuck, I would root for austerity over profligacy.

Will keep an eye on savings rate. Mine and in the aggregate.

 

Back to the 10-Ks.

[rukawa]

Comments about debt service ratios are valid points.

In a way, maybe we are no where near the thresholds that the likes of Reinhart and Rogoff have tried to describe.

 

What are the limits they describe and in what article/book do they describe them?

[Guest Cameron]

Comments about debt service ratios are valid points.

In a way, maybe we are no where near the thresholds that the likes of Reinhart and Rogoff have tried to describe.

 

What are the limits they describe and in what article/book do they describe them?

 

This Time Is Different: Eight Centuries of Financial Folly

 

One of the best books I've read.

[SharperDingaan]

A few comments ...

 

All countries have 3 main economies, 1) main street (do you have a job), 2) wall street (capital markets), & 3) underground (whatever for a price). Depending on the times, each will have greater or less prominence.

 

There are more jobs today than there were in the GFC. The bitch is that they are lower quality than they were before the GFC, they are precarious, and they come with less benefits; all true. However the reality is that there is now a paycheque - where there wasn't before. Main street wasn't the first in line to benefit, but it has benefited.

 

There is little doubt that Wall Street benefited from the equity boost of QE and low interest rates. It inflated asset values while leaving debt the same (equity boost), and added volume to offset the drop in the velocity of money. Without it many of the 'name' banks would have collapsed, and we would have seen the 1930's dust bowls all over again. Yes; Wall Street was first in line, but main street was close behind - had banking collapsed the main street of today would not exist. 

 

To many, errant banks should be harshly put down - as a lesson to the others. Letting Lehman go was the right thing to do, even if it almost killed us; today we are a lot stronger, and should be putting down the zombie banks. Per the UK - is the state really better off keeping RBS & others afloat, versus winding them up?  An RBS employee would say 'yes', but to everyone else its 'maybe'.

 

We aren't in 'normal' times, and haven't been for over a decade as we've worked through the GFC. History suggests that without the central bank interventions, we might well have needed a war to economically get as to where we are today. Some folks are still determined to make it happen. 

 

Different strokes.

 

SD

 

 

 

 

[Cigarbutt]

Great book that stirred its fair share of controversy including the very basic question if this wasn't mostly much ado about nothing.

Conceptually speaking, on the debt question, the authors are descendants of Fisher, Kindleberger and Minsky.

 

If interested, perhaps an article that more or less summed up the issue well:

 

https://www.newyorker.com/news/john-cassidy/the-reinhart-and-rogoff-controversy-a-summing-up

 

Of course infinitesimally low interest rates can give rise to an infinitesimally low risk of default and can support huge debt loads as well as lofty stock valuations.

 

http://brucewilds.blogspot.ca/2017/03/low-interest-rates-carry-hidden-cost.html

 

Extension of debt is not an issue when it is felt that the borrower has the ability to repay.

It's the confidence part that gives rise to more than infinitesimally small concerns.

The timing of which is impossible to predict.

Always looks easy in retrospect.

 

 

[Cigarbutt]

"History suggests that without the central bank interventions, we might well have needed a war to economically get as to where we are today."

 

Was able to swallow the liquidity maneuvers to save bankers et al from the economic Pearl Harbor even if the average Joe felt the pinch.

Have difficulty with life support though and so the populist movement, it appears.

Would politely submit that we have not "worked through" the "problem" that perhaps rb alludes to.

 

Currency wars, in theory, are played on paper. In reality, as maybe Keynes would have posited and as a guy named Kyle Bass presently conveys, synchronized easing now rests on the assumptions that a "stationary" state will persist and that no backlash will occur from those who stagnate.

 

I would submit that these are very shaky assumptions.

 

Next time questions will be asked, I somehow ask myself if two quotes from a previous President who, perhaps was not fully appreciated for his intellect, are relevant.

 

Versus 2008 liquidity crisis, in a Bagehotian style:

 

"If money isn't loosened up, this sucker could go down,”

 

Versus the next time solvency questions are asked:

 

"Fool me once...shame on...shame on you...Fool me...you can't get fooled again."

 

 

 

[Guest Cameron]

A few comments ...

 

All countries have 3 main economies, 1) main street (do you have a job), 2) wall street (capital markets), & 3) underground (whatever for a price). Depending on the times, each will have greater or less prominence.

 

There are more jobs today than there were in the GFC. The bitch is that they are lower quality than they were before the GFC, they are precarious, and they come with less benefits; all true. However the reality is that there is now a paycheque - where there wasn't before. Main street wasn't the first in line to benefit, but it has benefited.

 

There is little doubt that Wall Street benefited from the equity boost of QE and low interest rates. It inflated asset values while leaving debt the same (equity boost), and added volume to offset the drop in the velocity of money. Without it many of the 'name' banks would have collapsed, and we would have seen the 1930's dust bowls all over again. Yes; Wall Street was first in line, but main street was close behind - had banking collapsed the main street of today would not exist. 

 

To many, errant banks should be harshly put down - as a lesson to the others. Letting Lehman go was the right thing to do, even if it almost killed us; today we are a lot stronger, and should be putting down the zombie banks. Per the UK - is the state really better off keeping RBS & others afloat, versus winding them up?  An RBS employee would say 'yes', but to everyone else its 'maybe'.

 

We aren't in 'normal' times, and haven't been for over a decade as we've worked through the GFC. History suggests that without the central bank interventions, we might well have needed a war to economically get as to where we are today. Some folks are still determined to make it happen. 

 

Different strokes.

 

SD

 

 

 

 

 

I would say the UK is in a far worse position then we are. The household is running a deficit that is funding the economy. They are spending 12 billion pounds over their income plus 49 billion pounds in accrued private pension entitlements. 31 billion of the gap is funded by consumer debt and the other 30 is being funded by capital gains, as they've seen their household net worth increase to 25% of GDP.

 

In terms of the US if household net worth deviates from a percentage of disposable income far enough then the carrying cash flow won't support the price

[ICUMD]

My question is how will this debt unwind itself?

Some possible scenarios:

 

1. Collapse of Housing Bubble: ex. CDN housing.  Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates. 

 

2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption.

 

3. Rising Inflation:  currency devaluation followed by demands for rising wages

 

What I'm not sure is how globalization will help to contain some of these bubbles.

 

[Guest Cameron]

My question is how will this debt unwind itself?

Some possible scenarios:

 

1. Collapse of Housing Bubble: ex. CDN housing.  Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates. 

 

2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption.

 

3. Rising Inflation:  currency devaluation followed by demands for rising wages

 

What I'm not sure is how globalization will help to contain some of these bubbles.

 

Inflation isn't something to worry about QE just adds bank reserves, for those reserves to become money the banks actually have to lend the money. With the increased debt burden people's capacity to borrow has decreased which is why 2.1 trillion still sits in excess reserves. It's not supply, it's demand.

 

I don't think its going to be some calamity of personal defaults.

 

The long term interest rate is determined by growth and inflation, because of the large debt load that we have QE was becoming ineffective because the velocity of M2 has been slowing down to 1.

The more debt, the more money goes to servicing that debt which means less velocity, which leads to less inflation, less inflation means a lower long term rate.

 

This can go on for a while, Japan is what I've described above. For some reason we've decided that the way to solve a debt problem is with easy credit which just adds to the debt problem. We'd rather have short term gains and punt the ball on long term pain, its the same short sightedness that got us in the situation. 

 

Luckily because Japan is farther along this rope I don't think we will have to get there. For example for the BoJ to buy the entire bond market and 20% of their stock market would only take 5 years. If you ask me Japan will fall into a deflationary depression, then Europe, if their austerity measures don't work because they are closer along then America but still behind Japan.

 

If Japan doesn't cause ripples then Europe's dive will.

 

Ironically I have more hope for Europe, specifically Spain, while they have their social issues the private sector has been deleveraging.

 

To be clear I don't think QE is ending because the economy is getting better, its ending because the tool is now obsolete.

 

 

[Cigarbutt]

Debt services appear to be healthy.

 

https://fred.stlouisfed.org/series/TDSP

 

But deleveraging, what deleveraging?

 

https://fred.stlouisfed.org/series/HCCSDODNS

 

Then again, who wants to delever when they don't want/need to?

[Guest Cameron]

Debt services appear to be healthy.

 

https://fred.stlouisfed.org/series/TDSP

 

But deleveraging, what deleveraging?

 

https://fred.stlouisfed.org/series/HCCSDODNS

 

Then again, who wants to delever when they don't want/need to?

 

The statistic is slightly misleading since it doesn't show rent or car lease payments. Leases grew 91% over the last 5 years and around a third of car sales are done on lease.

 

But either way the focus should be on corporate debt at the moment in the US since most of the debt went to financial engineering activities rather than actual investment that will spend cash flow back to pay for the debt, over the last year interest rates have increased 80 basis points. Around 28% of the 70 trillion in debt that we have, whether its federal, local, household, will have to be repriced to this interest rate since most of the debt that has been taken out has been short term since 2013 whether thats short term debt at 1-2 years or 5 year debt when the interest rate was the low for short term debt at a .70 interest rate. 80 more basis points on 20 trillion is 160 billion in extra interest payments. That's a 160 billion hit to the 580 billion in average GDP growth per year we have had over the recovery or a 25% hit to GDP.

 

I would be surprised if the fed isn't easing interest rates in 2018-2019.

[ICUMD]

 

Inflation isn't something to worry about QE just adds bank reserves, for those reserves to become money the banks actually have to lend the money. With the increased debt burden people's capacity to borrow has decreased which is why 2.1 trillion still sits in excess reserves. It's not supply, it's demand.

 

I don't think its going to be some calamity of personal defaults.

 

The long term interest rate is determined by growth and inflation, because of the large debt load that we have QE was becoming ineffective because the velocity of M2 has been slowing down to 1.

The more debt, the more money goes to servicing that debt which means less velocity, which leads to less inflation, less inflation means a lower long term rate.

 

This can go on for a while, Japan is what I've described above. For some reason we've decided that the way to solve a debt problem is with easy credit which just adds to the debt problem. We'd rather have short term gains and punt the ball on long term pain, its the same short sightedness that got us in the situation. 

 

Luckily because Japan is farther along this rope I don't think we will have to get there. For example for the BoJ to buy the entire bond market and 20% of their stock market would only take 5 years. If you ask me Japan will fall into a deflationary depression, then Europe, if their austerity measures don't work because they are closer along then America but still behind Japan.

 

If Japan doesn't cause ripples then Europe's dive will.

 

Ironically I have more hope for Europe, specifically Spain, while they have their social issues the private sector has been deleveraging.

 

To be clear I don't think QE is ending because the economy is getting better, its ending because the tool is now obsolete.

 

I don't disagree with you at all.  QE is essentially masking a deflationary period, each round becoming less effective.  However, I think what's happening in Japan is arguable a bit different than North America.  Japan I feel is a more closed and protected economy with a different culture where people will not default on their debts. Also, I believe they have multi generational mortgages.  Hence the long standing stagnation/deflation ongoing.  In N. America/Europe, I think as deflation occurs and for example we see a correction in house prices, people will end up owing more than the underlying assets are worth.  Once people go upside down, I think people will simply hand back the keys of their house or car to the bank.  As these defaults start, their is a risk of stampede to the door.  Interest rates may rise due to default risk increasing.  The next step is for the printing money and inflation.  How long this takes to play out is anybody's guess.  We may in fact go through several more rounds of QE efforts and interest rate reductions.

[rb]

Corporate debt isn't that big of a concern. For a number of reasons.

 

1. Debt ratios are actually not that high. People can throw around big numbers like x trillion this and y trillion that and some may go wow!. But the reality is that it's a really big economy as well and these companies also make eye popping profits as well.

 

2. Even if corporates get too levered there are ways for them to delever that are not really damaging to the economy: cutting dividends, issuing equity, even chapter 11 reorgs.

[rb]

My question is how will this debt unwind itself?

Some possible scenarios:

 

1. Collapse of Housing Bubble: ex. CDN housing.  Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates. 

 

2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption.

 

3. Rising Inflation:  currency devaluation followed by demands for rising wages

 

What I'm not sure is how globalization will help to contain some of these bubbles.

What you talk about here are kind of the deleveraging scenarios that you don't want and that the smart powers that be are trying to prevent. Number 3 wouldn't actually be that bad but it's a very unlikely scenario. The ideal scenarios would be something like this:

 

4. People stop borrowing and they "grow out of their leverage". Nominal stock of debt remains constant while incomes go up (inflation + some real gains) over time. Leverage rations then go down.

 

5. Economy reaching a critical mass where demand is not aggregate deficient anymore. People pay debt slowly but the weakness in consumption is offset by business investment which is now revived thus still having full employment.

 

All of this take a long time to work through. You can't have a quick household delevering and still have an economy.

[Guest Cameron]

 

Inflation isn't something to worry about QE just adds bank reserves, for those reserves to become money the banks actually have to lend the money. With the increased debt burden people's capacity to borrow has decreased which is why 2.1 trillion still sits in excess reserves. It's not supply, it's demand.

 

I don't think its going to be some calamity of personal defaults.

 

The long term interest rate is determined by growth and inflation, because of the large debt load that we have QE was becoming ineffective because the velocity of M2 has been slowing down to 1.

The more debt, the more money goes to servicing that debt which means less velocity, which leads to less inflation, less inflation means a lower long term rate.

 

This can go on for a while, Japan is what I've described above. For some reason we've decided that the way to solve a debt problem is with easy credit which just adds to the debt problem. We'd rather have short term gains and punt the ball on long term pain, its the same short sightedness that got us in the situation. 

 

Luckily because Japan is farther along this rope I don't think we will have to get there. For example for the BoJ to buy the entire bond market and 20% of their stock market would only take 5 years. If you ask me Japan will fall into a deflationary depression, then Europe, if their austerity measures don't work because they are closer along then America but still behind Japan.

 

If Japan doesn't cause ripples then Europe's dive will.

 

Ironically I have more hope for Europe, specifically Spain, while they have their social issues the private sector has been deleveraging.

 

To be clear I don't think QE is ending because the economy is getting better, its ending because the tool is now obsolete.

 

I don't disagree with you at all.  QE is essentially masking a deflationary period, each round becoming less effective.  However, I think what's happening in Japan is arguable a bit different than North America.  Japan I feel is a more closed and protected economy with a different culture where people will not default on their debts. Also, I believe they have multi generational mortgages.  Hence the long standing stagnation/deflation ongoing.  In N. America/Europe, I think as deflation occurs and for example we see a correction in house prices, people will end up owing more than the underlying assets are worth.  Once people go upside down, I think people will simply hand back the keys of their house or car to the bank.  As these defaults start, their is a risk of stampede to the door.  Interest rates may rise due to default risk increasing.  The next step is for the printing money and inflation.  How long this takes to play out is anybody's guess.  We may in fact go through several more rounds of QE efforts and interest rate reductions.

 

Its not a risk of the people defaulting, its how long can Japan sell their public debt until the purchasers realize they aren't getting all of it back. Japans total debt to GDP is something like 600% of GDP and there is only four ways to overcome a debt burden, growth, inflation, repayment, or default. Specifically for their public debt Growth is out of the picture as we have seen as well as their population contraction. Repayment is out of the question since the government would need to run a surplus for more years than I care to do the math on while at the same time the private sector would have to run a deficit and when you look at the private sector debt burden that is out of the picture. So that leaves default and inflation and in this case actually firing up the printing presses.

 

The U.S and China own 3 out of the 10 trillion in japan public debt. 

[Guest Cameron]

My question is how will this debt unwind itself?

Some possible scenarios:

 

1. Collapse of Housing Bubble: ex. CDN housing.  Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates. 

 

2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption.

 

3. Rising Inflation:  currency devaluation followed by demands for rising wages

 

What I'm not sure is how globalization will help to contain some of these bubbles.

What you talk about here are kind of the deleveraging scenarios that you don't want and that the smart powers that be are trying to prevent. Number 3 wouldn't actually be that bad but it's a very unlikely scenario. The ideal scenarios would be something like this:

 

4. People stop borrowing and they "grow out of their leverage". Nominal stock of debt remains constant while incomes go up (inflation + some real gains) over time. Leverage rations then go down.

 

5. Economy reaching a critical mass where demand is not aggregate deficient anymore. People pay debt slowly but the weakness in consumption is offset by business investment which is now revived thus still having full employment.

 

All of this take a long time to work through. You can't have a quick household delevering and still have an economy.

 

also for this to work you can't have a downturn or have asset prices fall in sympathy.

[rb]

A downturn wouldn't be ideal. But you can have asset prices retreat.

[ICUMD]

 

What you talk about here are kind of the deleveraging scenarios that you don't want and that the smart powers that be are trying to prevent. Number 3 wouldn't actually be that bad but it's a very unlikely scenario. The ideal scenarios would be something like this:

 

4. People stop borrowing and they "grow out of their leverage". Nominal stock of debt remains constant while incomes go up (inflation + some real gains) over time. Leverage rations then go down.

 

5. Economy reaching a critical mass where demand is not aggregate deficient anymore. People pay debt slowly but the weakness in consumption is offset by business investment which is now revived thus still having full employment.

 

All of this take a long time to work through. You can't have a quick household delevering and still have an economy.

 

Re #4: This scenario is possible, but I think improbable based on human behavior.  For people to stop borrowing - they would need to give up on their lifestyle and make sacrifices - perhaps going from a BMW to a used car.  Downsizing homes etc.  I think most people will have a difficult time with this without defaulting.  Hence boom-bust cycles in the economy rather than gradual waves of acceleration and deceleration. 

 

Re #5:  I agree with Cameron - that QE and low interest rates are funding demand presently.  Without this debt creation, I think there will be major economic contraction - ie. deflation.  I'm not sure business investments will be able to compensate.

[Guest Cameron]

A downturn wouldn't be ideal. But you can have asset prices retreat.

 

Asset prices have been driven up where we have a future return of almost nill. So asset prices are out of gas and interest rates are out of gas.

 

In the event of something bad happening, and I hope it doesn't, they have no way of stimulating the economy so either they come up with something new or they take the outcome on the chin.

 

[ICUMD]

 

Its not a risk of the people defaulting, its how long can Japan sell their public debt until the purchasers realize they aren't getting all of it back. Japans total debt to GDP is something like 600% of GDP and there is only four ways to overcome a debt burden, growth, inflation, repayment, or default. Specifically for their public debt Growth is out of the picture as we have seen as well as their population contraction. Repayment is out of the question since the government would need to run a surplus for more years than I care to do the math on while at the same time the private sector would have to run a deficit and when you look at the private sector debt burden that is out of the picture. So that leaves default and inflation and in this case actually firing up the printing presses.

 

The U.S and China own 3 out of the 10 trillion in japan public debt.

 

Sure - I agree that national debts (alongside personal debts) also are at risk here. The interesting thing is that there is collusion between other nations to prop up debt burdened countries to avoid 'contagion' .  We've seen this with Greece, who knows whats going on behind the scenes with  Italy and Spain.  And you mention how US and China are helping out Japan.  The global coordination of 'inflation' and debt support makes it difficult to know where the chips will fall in my mind.  I guess it depends on who blinks first. 

[rb]

Well and economy is a big and complex thing which means that you have multiple of these scenarios happening all the time. We're out of crisis mode so 1 isn't really happening so much anymore. You don't really want to have a lot of 2 because that weakens aggregate demand (AD) and in turn investment (I). We seem to have moved away from that for now. So what's going on is that you have a mixture of 2, 4 and now finally some sort of 5.

 

The economy looks to be chugging along and investment is picking up. Keep in mind that I responds to AD. If AD is depressed there's no need to invest so I is depressed. AD right now looks like it is somewhere in the vecinity of where it should be -unemployment is low, though lowish inflation is a bit of a worry. In response to this I is increasing. I is about 2% of GDP too low, so let's say that I increases by 1% of GDP C can go down by 1% of GDP. This means that households can pay down 1% of GDP nominal without affecting AD and in turn without hurting the economy. Throw in some inflation and productivity gains and the result is that households can reduce their debt to GDP by about 3-4% per year without bad things happening. That's actually not bad and that's kinda sorta what's going on right now.

[Guest Cameron]

Well and economy is a big and complex thing which means that you have multiple of these scenarios happening all the time. We're out of crisis mode so 1 isn't really happening so much anymore. You don't really want to have a lot of 2 because that weakens aggregate demand (AD) and in turn investment (I). We seem to have moved away from that for now. So what's going on is that you have a mixture of 2, 4 and now finally some sort of 5.

 

The economy looks to be chugging along and investment is picking up. Keep in mind that I responds to AD. If AD is depressed there's no need to invest so I is depressed. AD right now looks like it is somewhere in the vecinity of where it should be -unemployment is low, though lowish inflation is a bit of a worry. In response to this I is increasing. I is about 2% of GDP too low, so let's say that I increases by 1% of GDP C can go down by 1% of GDP. This means that households can pay down 1% of GDP nominal without affecting AD and in turn without hurting the economy. Throw in some inflation and productivity gains and the result is that households can reduce their debt to GDP by about 3-4% per year without bad things happening. That's actually not bad and that's kinda sorta what's going on right now.

 

The balance sheet run off will cut 2 percent of GDP. I would agree with you if the Fed wasn't doing what its said it was going to do.

[rb]

The balance sheet run off will cut 2 percent of GDP. I would agree with you if the Fed wasn't doing what its said it was going to do.

How exactly will it cut off 2% of GDP?