Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Debt is a drug...Danger of Overdose?

Interest-Rates / US Debt Apr 04, 2009 - 02:57 PM GMT

By: Andrew_Butter

Interest-Rates

Best Financial Markets Analysis ArticleKids are diff-erent today, I hear evry mother say...but there's a little yellow pill...Doctor please, some more of these...outside the door, she took four more. (Rolling Stones: Mother's Little Helper).

The problem with drugs is you develop a tolerance to the thrill part, without necessarily developing a tolerance to the addictive part.


The situation at the moment is that USA and UK and a few other "developed" nations ran up some large debts (private sector plus public sector (collectively)), and there is a problem "servicing" the debt. The solution apparently is for the government to take on a load more debt. And that's smart...because?

The economy can't survive without debt.

According to legend every $4 of debt creates $1 of GDP growth. So that's it then? Just pile on more debt, as much as you can get.

I wonder, ever since Secretary Paulson said in July 2008 "The US banking system is safe and sound", I don't know who to believe.

If debt is really that essential for GDP Growth, you would have thought that there would be a relationship between the amount of debt (as a % of GDP) and GDP growth.

Eyeballing those lines it's hard to see a clear relationship between piling on more debt and increased economic growth, rather the opposite, unless my astigmatism is playing up again.

How about the effect of an increase in total debt in USA on the increase in GDP the next year - it's a pretty crude analysis but perhaps it serves to illustrate a point:

OK the "confidence" in the best-fit line is pretty useless, but there does appear to be a trend. And by the way I'm using nominal because I don't believe CPI numbers (but it works similar for "Real").

Bang for buck?

Over the past seven years USA in aggregate has been increasing it's total debt by an average of about $2,500 billion dollars a year (private + public), so I suppose that's about where that "rule of thumb" 4:1 figure comes from? What I'm wondering is what the current commitment to increase debt, will achieve if the net increase TARP + TALF + PPIP etc goes much over $2,000 billion a year (I lose count of the trillions, but it seems that every time you blink there is another trillion for this or that).

From this simple analysis it does look suspiciously like the amount of bang for buck is going to go down as the amount of debt that is piled on, goes up.

Deleveraging

I don't know what the US total debt was end 2008, but there is a chance that it could have been less than 2007 simply because a lot got written off. That's a good way to deal with the debt to GDP "problem", just don't pay the debt back and it will go away.

That's the beauty of non-recourse, if you walk away the people holding the notes get stuck with the loss (no more cutting out a pound of flesh - which might make more sense in the USA at the moment than the death penalty).

What just happened is that a lot of people walked away and the people who got stuck with the loss were ordinary Americans with savings plans, plus foreigners who had made the mistaken assumption that, as Hank Paulson said in July 2008, "the US banking system is safe and sound " and as Allan Greenspan said a few years earlie r - "Don't worry, it's just a bit of froth".

But hey, like the man said in Under Siege 2 "assumptions are the mother of all F@@K ups". Tough cookie, everything was not as it seemed, that's what happens when you believe people like Hank Paulson and Allan Greenspan; my suggestion is chose your guru more carefully next time!

That might explain why USA can expect a drop in nominal GDP of 5% to 6% in 2009 as was forecast by Professor Roubini, if indeed the amount of "performing" debt went down net $1,000 billion, that would look like a very probable outcome.

So how much debt does America need for it's next fix?

Paul Krugman says that a $1,000 billion for the stimulus plan is nowhere near enough, looking at the chart it looks to me like he could be right.

No one likes government going on a spending spree with borrowed money (unless you know a good lobbyist), but the simple fact is that the main mechanism for piling on private sector debt (the MBS market), is busted. Whether it was a proper market, or whether it was crooked is another subject, like it or not, the process of "originating and distributing" those "cans of sardines" is dead right now (XXXXXXXX).

So if GDP growth is an objective then the ONLY way is for government to borrow and spend instead. The effectiveness of that will depend on how much gets spent on things that can be expected to generate enough money in the future to pay back the debt, as opposed to how much gets stolen or wasted on things that have no chance of paying back.

Which is always the problem with government spending, and it might explain why that curve levels off, the more "easy" money there is floating about, the easier it is for people to grab a bit and party, or steal "just a little bit".

So is PPIP a good idea?

No it's not, it will not generate a profit, it will cost easily $1,000 billion and there is a limit on funds. Big picture - forget about mark-to-market, basically those loans are performing, so just put that aside and deal with it later. $1,000 billion could profitably be spent somewhere else.

And talking about the perennial problem of waste (or perhaps something worse), personally I don't like the look of those guys who have been brought in to help out, not one bit!

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules