Twin Peaks: Household Debt Vs. GDP (The problem is us)

Questions on how we spend our money and our time - consumer goods and services, home and vehicle, leisure and recreational activities
MatSci
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Post by MatSci » Wed Mar 04, 2009 9:47 pm

A similar graph of debt vs. GDP with some discussion is available at the end of this pdf document.

www-dot-hoisingtonmgt-dot-com/pdf/HIM2008Q3NP-dot-pdf
(Edit the dots. Can't post links)

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VictoriaF
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Post by VictoriaF » Wed Mar 04, 2009 10:01 pm

MatSci wrote:A similar graph of debt vs. GDP with some discussion is available at the end of this pdf document.

www-dot-hoisingtonmgt-dot-com/pdf/HIM2008Q3NP-dot-pdf
(Edit the dots. Can't post links)
www.hoisingtonmgt.com/pdf/HIM2008Q3NP.pdf

Valuethinker
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Re: Twin Peaks: Household Debt Vs. GDP (The problem is us)

Post by Valuethinker » Thu Mar 05, 2009 12:17 pm

petrico wrote: Valuethinker,

It's actually scary how similar your response is to the one given by Treasury Secretary Tim Geithner before the Senate Finance Committee today when asked to address the comparison of household debt as a %-age of GDP in 1929 and in 2007 -- as described in the NPR piece. It's as if you prepped him!


At the end of the response in which he echoed Valuthinker's caution about an overcorrection, Geithner added this, "But you're right to point out that part of what we're going through is a necessary process of adjustment after a long period where people were borrowing beyond their means. And that makes this recession -- will make this recession deeper and more traumatic than it otherwise would have been."

That's what I was afraid of. :roll:

Thanks very much, VT, for your insights.

--Pete
Tim and I are old muckers.... not ;-).

So I am the approved voice of conventional wisdom and therefore completely wrong.

Cheers ;-). ;-).

btenny
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Post by btenny » Thu Mar 05, 2009 12:18 pm

The reality according to the paper

Quote

"Clearly the magnitude of the debt problem is unprecedented and years, not months or quarters, will be required to bring debt into some reasonable relationship with economic activity. As long as this situation persists, the U.S. faces a difficult economic environment. This is due to the fact that over the past four decades every additional dollar of debt created 86 cents worth of GDP, and with debt shrinking, GDP will struggle to generate positive growth."

So we are years away from any kind of uptick in growth or any rebound in the economy. So maybe that broker who is selling all his clients stocks is right. The sky is falling and we just don't recognize it yet. WOW.....

Bill

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iceport
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Total Debt Graph

Post by iceport » Sat Mar 07, 2009 8:44 am

MatSci wrote:A similar graph of debt vs. GDP with some discussion is available at the end of this pdf document.

www-dot-hoisingtonmgt-dot-com/pdf/HIM2008Q3NP-dot-pdf
(Edit the dots. Can't post links)
Thanks, MatSci, for an interesting paper and site linked within. In addition to the comments Bill cited, the Q3 2008 review also noted, "As the chart indicates, 300% was the 1933 high of the total debt to GDP ratio. The current peak, however, was reached due to a surge in debt, while the 1933 peak reflected a dramatic fall of nominal GDP, the denominator of the ratio. The new record level of debt in the second quarter reflected the worsening situation among corporations, both financial and nonfinancial."

Then the Q4 2008 edition notes, "The debt level of the U.S. has reached unprecedented proportions (Chart 1). More important than the level, however, is the fact that for the last few years the debt was improperly loaned and financed. In the words of the late economists Minsky and Kindelberger, this type of lending activity implies there is little likelihood of repayment of principal and interest. Stock prices have plunged, and with home prices plummeting, and commercial and industrial properties losing value, a deflation of assets has clearly begun while the underlying debt remains constant."

This graph is from the Hoisington Quarterly Review and Outlook, Fourth Quarter 2008:

Image

For even more consensus, in the winter 2009 issue of In the Vanguard, Gus Sauter addresses the issue:
Question: One theme that seems to be emerging from the financial turmoil is that we’ve been borrowing too much. But if we borrow less, will the economy struggle more?

Mr. Sauter: I believe that the phenomenon we’ve seen over the past year—deleveraging [reducing debt]—will continue for many years to come. We need to continue to see deleveraging of personal balance sheets as well as financial institutions. This trend will help the economy in the long run. But deleveraging means that when we do come out of the recession, we probably won’t see a typical recovery. When the economy emerged from the severe recessions of the 1970s and early 1980s, it experienced a burst of economic activity—GDP growth of 6% or more. But people will still be reducing their debts as we come out of this recession. It will take a number of years for that to play out, so we may emerge from this recession with, say, 2% economic growth, and I think it will take a while for the economy to build up steam to 3% or 3.5% growth.
:^(

--Pete

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iceport
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Jeremy Grantham and private debt levels

Post by iceport » Sun Mar 08, 2009 5:30 pm

Add another respected professional to the list of those forecasting a long, tough slog due, at least in part, to private debt levels: Jeremy Grantham, in the January 2009 GMO Quarterly Letter.

In topic 2, Lost Illusions: The Loss of Perceived Wealth and Stranded Debt, he writes:
Now the illusion of wealth has been lost, with formidably negative effects on animal spirits. My hero, Keynes, emphasized the importance of shifts in animal spirits in economics, and explained how shifts in such spirits could ruin the most carefully calculated investment decisions.
To be successful, we really need to halve the level of private debt as a fraction of the underlying asset values. This implies that by hook or by crook, somewhere between $10 trillion and $15 trillion of debt will have to disappear. Given where we are today, there are only three ways to restore a balance between current private debt levels and our reduced, but much more realistic, asset values: we can bite the bullet and drastically write down debt (which, so far, seems unappealing to the authorities); we can, like Japan did, let the very long passage of time wear down debt levels as we save more and restore our consumer balance sheets; or we can inflate the heck out of our debt and reduce its real value.
Each of the three realistic possibilities listed above would be extremely painful, each is loaded with uncertainties, and even the quickest of them would take several years. Our path this time is likely to involve a hybrid approach: we will certainly take some painful debt liquidations; this crisis will almost certainly take far longer than normal to play out; and probably, before a new equilibrium is reached, we will see infl ation rates that are well above normal.
This is a good time to look at the Japanese crisis of 1989 to present since, along with the Great Depression, it is probably one of the two most relevant examples for today’s problems. The Japanese had an even bigger problem in write-downs of “wealth” than we have now. They had to write down perceived wealth by an amount equal to a stunning three times GDP! Even in 1929, we had to write off amounts equal to only three quarters of a year’s GDP, as the stock markets then were less developed and housing was decidedly pre-McMansion. This time in the U.S., however, we must write down perceived wealth or capital by almost precisely one and a half times GDP, worse than the Depression but happily much less than Japan.
By now, of course, I'm just talking to myself in public, but it is somehow cathartic. Luckily, it only takes up a few more bits of data on some server somewhere, so I don't feel too guilty about it. Plus, the GMO letter is a very interesting read, if anyone's interested.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

hewhomustnotbenamed
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Re: Jeremy Grantham and private debt levels

Post by hewhomustnotbenamed » Sun Mar 08, 2009 6:19 pm

petrico wrote:Add another respected professional to the list of those forecasting a long, tough slog due, at least in part, to private debt levels: Jeremy Grantham, in the January 2009 GMO Quarterly Letter.

In topic 2, Lost Illusions: The Loss of Perceived Wealth and Stranded Debt, he writes:
Now the illusion of wealth has been lost, with formidably negative effects on animal spirits. My hero, Keynes,
By now, of course, I'm just talking to myself in public, but it is somehow cathartic. Luckily, it only takes up a few more bits of data on some server somewhere, so I don't feel too guilty about it. Plus, the GMO letter is a very interesting read, if anyone's interested.

--Pete
Perhaps, but anybody that is foolish enough to admit, keynes is their hero makes me wonder about their gullibility .
To me that's right up there with stating "Men in Black" is a documentary. :lol:
I might be crazy but, I ain't stupid.

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iceport
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Re: Jeremy Grantham and private debt levels

Post by iceport » Sun Mar 08, 2009 6:50 pm

hewhomustnotbenamed wrote:Perhaps, but anybody that is foolish enough to admit, keynes is their hero makes me wonder about their gullibility .
To me that's right up there with stating "Men in Black" is a documentary.
Just when I thought we'd avoided all the usual political attacks...
"Discipline matters more than allocation.” ─William Bernstein

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