Financial Debt Destroyed Our Economy
Interest-Rates / US Debt Oct 07, 2011 - 12:57 PM GMTBy: Barry_Elias
The financial industry had few assets to market in the past three decades.
As such, they fervently pursued the marketing of debt. In many instances, it appears this methodology was a sustained, premeditated, and deceitful endeavor).
The financial debt destroyed our economy.
The graphic below describes the relationship amongst financial debt, total debt, and total GDP (income):
| Year | 1977 | 2008 | 2010 |
|---|---|---|---|
| GDP | 2111.6 | 14081.7 | 14755.0 |
| Financial Debt | 337.8 | 17119.1 | 14153.1 |
| Total Debt * | 3293.0 | 52433.8 | 52492.4 |
| Financial Debt/Total Debt | 10.3% | 32.6% | 27.0% |
| Financial Debt/GDP | 16.0% | 121.6% | 96.0% |
| Total Debt/GDP | 156.0% | 372.4% | 355.8% |
* Total debt includes all private and public debt
From 1977 to 2008 (three decades), financial debt expanded 50-fold, while total debt grew only 15-fold.
During this time, financial debt as a percentage of total debt tripled. As a percentage of income, financial debt increased more than 7-fold, while total debt grew only 2.3-fold.
This extraordinary quantity of financial debt metastasized throughout our economy.
It was a pathology that reflected the presence and practice of a myopic, materialistic value system focused on individual hedonism at the expense of society. This value system is anathema to value added productivity, learning, knowledge, and wisdom.
Our future must be premised on the latter value system.
The societal ills, which formed over decades, will take decades to mend.
The cleansing process has begun with the deleveraging of debt (debt removal). From 2008 to 2010, financial debt fell nearly $3 trillion from roughly $17 trillion to $14 trillion (a 17.3% reduction). However, total debt remains relatively constant, due to a commensurate increase in federal government debt.
Debt repayment or forgiveness is ineffective in promoting future economic growth. This type of expenditure lacks the template to stimulate creative, entrepreneurial activity that perpetuates supply and demand for new goods and services.
In economic parlance, this translates to low monetary velocity (low money turnover). When monetary turnover is low, less income is produced with the same quantity of money. Therefore, future economic growth is stymied.
Before our economy can begin the upward trajectory, the excess debt needs to be cleansed from the system.
Total debt as a percentage of income should be under 200%. Since GDP is $15 trillion, total debt should be roughly $30 trillion (200% of $15 trillion).
This can be achieved in one of three ways:
1. Reduce debt by $20 trillion, from $50 trillion to $30 trillion (Total Debt / GDP = $30
trillion / $15 trillion = 200%).
2. Increase GDP $10 trillion, from $15 trillion to $25 trillion (Total Debt / GDP = $50 trillion /
$25 trillion = 200%).
3. Combination of items (1) and (2) above (as the GDP grows, the required level of debt
reduction diminishes).
For example:
If GDP grows at 2% per annum ($300 billion) for two decades, GDP will increase by $6 trillion, from $15 trillion to $21 trillion. For total debt as a percentage of GDP to be 200%, total debt should be $42 trillion ($42 trillion / $21 trillion = 200%). This represents an $8 trillion reduction in debt ($50 trillion - $42 trillion) over 20 years, an average of $400 billion per year.
To complete this endeavor in half the time (i.e., one decade) would require an annual debt deleveraging of $1.4 trillion.
It is feasible for this process to be concluded within one to two decades.
This time frame is manageable.
The government and the financial industry created an economic template that did serious damage to our socioeconomic construct over the past three decades.
The proper repair may take decades to complete effectively.
By Barry Elias
eliasbarry@aol.com, beb1b2b3@gmail.com
Barry Elias provides economic analysis to Dick Morris, a former political adviser to President Clinton.
He was cited and acknowledged in two recent best-sellers co-authored by Mr. Morris: “Catastrophe” and “2010: Take Back America - a Battle Plan.” Mr. Elias graduated Phi Beta Kappa from Binghamton University with a degree in economics.
He has consulted with various high-profile financial institutions in New York City.
© 2011 Copyright Barry Elias - All Rights Reserved
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