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Guest Post: “Nobody understands Debt (But Me)”
From Alexander Gloy of Lighthouse Investment Management
"Nobody understands Debt (But Me)"
Luckily they are easy to spot: the demagogues, the manipulators and the hired claqueurs. Unfortunately, there is no lack of media willing to provide a platform to perform their insidious game.
Take Nobel-prize wielding economist Paul Krugman. In an article for the New York Times (“Nobody understands debt”) from January 1, 2012, he writes:
“Through most of 2011, as in 2012, almost all of the conversation in Washington was about the allegedly urgent issue of reducing the budget deficit.”
His opening gambit: a reduction of the budget deficit is not an urgent issue. Really? The US has reached 100% debt-to-GDP, and each year another 10%-points get added to the pile. Those $15 trillion exclude a vast array of debt from quasi-governmental organizations (FannieMae, FreddieMac, etc) and unfunded liabilities (Medicare, Social Security, Veterans’ benefits) resulting in a total debt of $61.6 trillion, as per the Heritage Foundation. This explains Krugman’s disdain for the institution, as we will see below. He continues:
“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans.”
Krugman tries to portray those who are trying to save the country by reducing spending as heartless and mean-spirited people, when those attributes should apply to those who applauded spending future generations’ taxes to the point of collapsing the financial system. To add insult to injury:
“When people in [Washington] D.C. talk about deficits and debt, by and large they have no idea what they’re talking about.”
He brings out the “I know better – I have a Nobel prize” argument. And the reasoning:
“Perhaps most obviously, the economic ‘experts’ on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while they’ve been waiting, those rates have dropped to historical lows.”
This is right in line with those people who, back at the height of the housing boom, ridiculed anyone warning about dangers of a possible fall in housing prices. Only because riding your bike with your hands up in the air went smoothly for 10 seconds doesn’t mean you will make it in one piece over the pothole. Krugman’s rhetoric matches that of a mayfly rejecting the possibility she might die at the end of the day because so far the sun has never set during its life.
Could the international financial crisis have led to a flight to safety into US Treasury bonds? Could the trillions of Fed buying have helped? Could the largest non-official buyer of Treasuries (Cayman Islands) be hedge funds looking for a cheap way to “hedge” stock market risk, because, in a twisted way, they rely on negative correlation between stocks and bonds (if one goes up, the other one goes down) to continue ad infinitum? Where else are the Chinese going to put their trillions of foreign exchange assets accumulated by holding the Yuan down? In the crumbling Euro? Back to mayfly Krugman:
“For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.”
If anything, the size of the debt problem is underestimated. It is amazing to see how the problem (too much spending leading to too much debt) is being turned around 180 degrees into “the problem is too little spending”.
“Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing.”
Paying back debt doesn’t impoverish; spending money you don’t have does. But Mayfly doesn’t relent and tries to spell it out in simple terms for the average American:
“They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways. First, families have to pay back their debt. Governments don’t – all they need to do is ensure that debt grows more slowly than their tax base.”
Exactly. Let’s look at how US GDP and debt have developed over the last 46 years:
Debt caught up with GDP, reaching 100% in Q4 2011. Debt (taking only the “on-the-books” part) is growing faster than GDP.
Over the last three years, US debt has grown by roughly $4 trillion , while GDP has grown only by $1 trillion. One additional dollar of debt has led only to 25 cents additional GDP. This is the “marginal utility of debt” (how much you get out of an additional dollar of government spending). At elevated debt levels, debt service (interest and redemptions) carves out an increasingly high share of tax revenue, leaving less for productive uses.
The lower chart shows rolling 3-year periods for growth in GDP and debt as well as the resulting ratio (marginal debt utility). It has almost reached zero. Granted, the increase in government debt has partially been “diluted” by a deleveraging of the private sector. Still, 2012 will be the fourth year in a row with a budget deficit exceeding $1 trillion. Continuing this pace, combined with a marginal debt utility of 0.25 would get the US to a Greece-like 143% debt-to-GDP ratio within 9 years. But Mayfly tells us we don’t understand.
“We need more, not less, government spending to get us out of our unemployment trap. And the wrong-headed, ill-informed obsession with debt is standing in its way.”
How can a Nobel-prize carrying economist, who is presumably smart, write such nonsense? “He knows better”, says Jim Rickards (author of “Currency Wars”). And that makes Krugman so dangerous. Decision makers will reference his “debt does not matter” mantra over and over again – until it’s over. Thank you, Mayfly. You really understand debt – and how to make others believe it doesn’t matter.
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The Christians think they know the truth. Why is their religion better than some other?
Krugman's Mars Attacks plan. The 50% Keynesian Solution.
http://confoundedinterest.wordpress.com/2012/02/06/krugman-nobody-understands-debt-but-krugman-the-50-keynesian/
The fact that Reagan and W both occupied the White House during periods of increasing debt in no way excuses the current occupant of the White House and current Congress of their responsibilities for the absurdly huge contribution to the debt they have made. Get out of the duality of Republicans vs. Democrats, understand that both National Parties are corrupt to their core, and condemn debt wherever you find it. Why, because, like the pain in your head associated with brain cancer, it helps to defeat the symptom so you have the wherewithal to deal with the underlying disease (in the instant case, that would be Statism). Ultimately, we will have to change the American mindset concerning expectations and the role of government about 180 degrees. It will be tough to do. It took nearly 230 years to create the ludicrous mental framework possessed by most Americans (i.e., the Federal Government will save us from ourselves). Only a total social, political, and economic collapse, or a long, 200 year struggle, will restore the liberty, private property, and free enterprise for which America was intended.
Now that I think about it, perhaps TPTB are doing God's work: Doesn't the Old Testament have some talk about forbidding to lend money with interest?
I'm not sure if I'm being sarcastic or not...
Paul 'War = Wealth' Krugman is totally senile and away with the fairies
..and judging by the Peace Award given to Obumma clearly the entire Nobel Committee are too
Socialism, it's a brain waisting disease
The problem with the likes of Krugman is that they only see one side of the coin.
Currency is nothing more than a means to bring about an exchange of underlying assets and all assets are a reflection of the labor needed to create, maintain, replace, restore, replenish, etc.
Looked at in reverse then, debt is not so much a promise to pay but a correction in an imbalance in the underlying asset exchange. It's hard for a simple man like me to explain as I write this out as I go, but without excess there can be no debt.
Excess rules the roost, not debt. There must first be excess for there ever to be debt.
But again, for there to be excess there must be an imbalance in the exchange of labor.
So, only an imbalance creates excess and only excess permits debt.
So where is this labor imbalance that is creating so much excess to require so much adjustment through debt?
Of course it's largely being manufactured, made-up, invented.
Spread across all asset classes, the amount of labor needed to extract value has been adulterated by fiat. It may take only $800 of labor in today's currency to extract an ounce of gold, but the market says it's about $1,800. It is this $1,000 difference which becomes debt. Thus, for that amount of debt which is captured by gold, "all is well that ends well" so long as gold does not return to $800 and all other "false labor" along with it. It is critically important to look past gold or corn or bricks and to remain focused on the ("invisible hand" of) labor (that keeps an accurate ledger regardless of any perfidy) involved because labor is all that matters and by labor I mean human effort, be it physical, mental or neutral (the invisible hand accounts for all, even the time and effort of this reply) . Time is indeed money.
So how long can the imbalance remain in lieu of an event which collapses labor? Certainly it can reach a saturation point where demand wanes, but people need to eat. Disaster can create it, but the events of very large things, like economies, once in motion, tend to stay in motion long after even the collapse has occurred. The higher the high, the lower the low.
The key, of course is labor, so long as effort is made, effort is rewarded. The ant colony does not die with the queen, the colony dies when there are no longer enough births to replace deaths. Work is it's own reward and the failure of a society to labor more than the debt incurred is the only thing that can bring the lie to heed.
Technically Krugman is right. Debt doesn't matter to GDP. GDP is people getting up, going to work and producing / consuming.
The problem is debt matters a whole hell of a lot to WEALTH.
For debt not to matter, you have to assume that people who produce more then they consume, and thus fund the debt of those that consume more then they produce - don't care about getting paid back.
So yes, if their is no wealth effect, if I don't care about the millions I have in the bank and am willing to keep producing for nothing in return - then debt doesn't matter to GDP.
If only their were some way to force producers to continue producing.
What he is describing is socialism. If the over consumers control the factors of production rather then the over producers - then debt doesn't matter.
Let's look at it another way.
You have over producers and over consumers.
Sustainable GDP is the production of over consumers plus the consumption of over producers.
If you look at it across the entire world, and over 50 years - it's almost the same as actual GDP. But when you narrow it down to specific countries and shorter time frames - the gap grows.
If over consumers can only consume what they produce because over producers are no longer willing to lend to them, then GDP depends on what over producers do. Do they increase consumption? Do they consume the same things?
Given the disparity between our over consumers and over producers - the latter is unlikely. 90% of over production is a few tens of thousands of individuals globally that over produce by millions or billions a year. Out over consumers are BILLIONS that consume 10-20% more then they produce.
If the billionaires are all willing to consume THOUSANDS of Ford Focuse and, $200k homes each. If they are willing to consume a thousand meals at McDonalds and truckloads of WalMart goods each EVERY DAY. Then all will be ok.
Otherwise you get severe inflation in what goods they do buy. Meanwhile the over consumers still have to consume 20% less.
And it gets worse if you go to the individual and daily level. Whom of us consumes exactly what we produce everyday?
The only way for Krugmans argument to work (debt doesn't matter) is to have some greater entity control production AND allocation of production so that producers are forced to produce and sell goods to over consumers - knowing they will not be paid back.
I'n other words - debt doesn't matter in a society with little to no GINNIE coefficient. As disparities between producers and consumers grow - debt matters more and more. Until you get a great reset where producers realize the decades of wealth they have accumulated are worthless, that the promises of "if you under consume a little bit today, someday we will let you overconsume" are false.
Debt is based on over consumers eventually over producing to pay back today's over producers. Krugmans world is one where the over consumers get to stiff the over producers, but the over producers are ants controlled by the hive mind - so they don't care.
Let's look at it another way.
You have over producers and over consumers.
Sustainable GDP is the production of over consumers plus the consumption of over producers.
If you look at it across the entire world, and over 50 years - it's almost the same as actual GDP. But when you narrow it down to specific countries and shorter time frames - the gap grows.
If over consumers can only consume what they produce because over producers are no longer willing to lend to them, then GDP depends on what over producers do. Do they increase consumption? Do they consume the same things?
Given the disparity between our over consumers and over producers - the latter is unlikely. 90% of over production is a few tens of thousands of individuals globally that over produce by millions or billions a year. Out over consumers are BILLIONS that consume 10-20% more then they produce.
If the billionaires are all willing to consume THOUSANDS of Ford Focuse and, $200k homes each. If they are willing to consume a thousand meals at McDonalds and truckloads of WalMart goods each EVERY DAY. Then all will be ok.
Otherwise you get severe inflation in what goods they do buy. Meanwhile the over consumers still have to consume 20% less.
And it gets worse if you go to the individual and daily level. Whom of us consumes exactly what we produce everyday?
The only way for Krugmans argument to work (debt doesn't matter) is to have some greater entity control production AND allocation of production so that producers are forced to produce and sell goods to over consumers - knowing they will not be paid back.
I'n other words - debt doesn't matter in a society with little to no GINNIE coefficient. As disparities between producers and consumers grow - debt matters more and more. Until you get a great reset where producers realize the decades of wealth they have accumulated are worthless, that the promises of "if you under consume a little bit today, someday we will let you overconsume" are false.
Debt is based on over consumers eventually over producing to pay back today's over producers. Krugmans world is one where the over consumers get to stiff the over producers, but the over producers are ants controlled by the hive mind - so they don't care.
"Kluttsman" knows exactly what he is doing (i.e. debt doesn't matter).... and he knows his butter is spread on by the edomite-bankers..... and he knows it's a big lie..... Our media controlled minions might not have this figured out yet, but I bet the Greeks have it figured out by now... and do we want those kind of problems ?
Call me naive but wouldnt the best way to eliminate debt be to get people employed? How does paying our debts solve the employment problem? Wouldnt it be akin to an unemployed or underemployed person stopping looking for work and spending every last dime paying off one's debts? How does that improve long term prospects?
Sounds more and more like Krugman strives to become the Havenstein of our times.