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Summarizing The Global Balance Sheet's Negative Feedback Loop Of Debt
Cohen Investment Strategies courtesy of Contrary Investing, submits:
The Dangerous Negative Feedback Loop
Global Balance Sheet Recessions
Global governments are carrying more debt than ever and raising question as to whether or not a second — and perhaps even more dangerous credit crisis — is inevitable. The clock is ticking and every second, the world takes on more debt. In 2001, global government debt totaled $18.2 trillion. Fast-forward a decade, and the figure now totals nearly $44 trillion, an increase of 140 percent (more than 9.0% a year). The chart below depicts the countries with the highest and lowest debt levels.
According to The Economist, global sovereign debt is forecasted to grow an additional 7% in 2012 reaching a historical high of $47 trillion. Measuring debt against gross domestic product (GDP), the global debt-to-GDP ratio at the end of 2010 reached approximately 80%. While the heaviest balance sheet offenders include troubled European countries like Italy, Greece and Portugal (See Figure 1 below), the United States isn’t far behind with $15 trillion in debt and a debt-to GDP ratio topping 100%. And tipping the scale at over 200% at the end of 2010 was Japan. The result of this rising debt means more government interference, a further slowdown in the already debilitated economic environment and the possibility of further citizen uprisings.
One of the problems with economic crises is that mainstream economists and financial advisors either don’t see them coming or simply won’t admit to them. That’s exactly what happened in the fall of 2008, when the financial crisis kicked off in the United States. Since that time, governments have continued to spend, all while production has slowed and unemployment has skyrocketed. As we enter the fourth year of the post-crisis environment, there is no sign of growth that is impressive enough to get us out of the negative feedback loop in which governments have continued to operate. A negative feedback loop takes hold when massive government debt loads, a weakening financial system and a slowing economy feed off each other, interrupted by Federal Reserve and other central bank reflationary attempts. As shown in the chart below, rising debts become unsustainable and trigger austerity measures designed to reduce spending and/or increase taxes or other revenue sources to try and reduce debt. In significantly depressed economies, the drag continues and a recession or even depression like conditions hit. The more production and employment falter, the more lending contracts, causing further harm to the economy, missed budgets and higher bond yields. The result is a downward spiral of business and financial activity and a banking crisis usually ensues. Under pressure to stimulate the market, the Federal Reserve and other central banks carryout band aid fixes by printing money and governments implement additional austerity measures which starts the vicious cycle of the feedback loop all over again.
Negative Feedback Loop
In the center of the feedback loop is what we call Euphoric Mania. This is when the Federal Reserve and central banks step in to help with their band-aids whether it’s printing money, lowering rates, coordinating central bank action, or expanding the balance sheet by trillions. But, like any high, the lift is temporary and doesn’t take hold. In no time at all, we are back to where we were at the top of the loop, because without sustainable economic growth, the band aids don’t solve the problem.
Roger Nightingale, well-known European economist and strategist at RDN Associates, believes a 2012 global recession is a 65 to 75 percent probability and that further deterioration into a lengthy depression is possible. So what does this mean in terms of a growth outlook? Nightingale offered this forecast:
“The peak rate of growth for the world's economy occurred more than 12 months ago. We are probably going into negative territory around spring of next year; it is not for certain, but that is the most likely scenario… should recession kick in; the global economy might be too weak to generate any GDP growth for years, or even decades. When the downturn ends, and when the upturn begins, will it be powerful enough to take us into some sort of growth again? Or are we going to find ourselves in a protracted depression-type scenario?"
The fix needs to come from a unified front, not just a single country or continent. When we look at the three global pillars of the world economy — the United States, Europe and China — sure, each has its own problems, but each one’s fiscal choices impact the globe as a whole. And really, it’s four pillars when we add the Federal Reserve. We are a four-legged intertwined economic and financial system that relies heavily on each other for banking resources, government debt issuance, investments and exports. The feedback loops are never ending. And when economic growth stalls, debt accumulation increases. Without taking tough, systemic and coordinated economic measures including fiscal consolidation and a commitment by governments to cut rising deficits and reduce what are, in some cases, dangerous levels of national indebtedness, a second crisis may indeed be inevitable. The world is trying to recover from the worst financial crisis in 70-years and is suffering from debts levels not seen in decades and the crisis continues to intensify. And, as the graph below shows, with the exception of Ireland, countries need just as much, if not more, financing to cover debts in 2011 compared to 2010. Nothing has changed.
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That 7% rate of increase means a complete DOUBLING in only TEN years! Worse is is that this rate is likely going to further increase. This thing is going to blow big time.
Most guys betting on the oft-predicted "collapse" are now broke.
Dead bodies littered everywhere.
All the guys who shorted retail stocks and REITS pretty much destroyed.
Guys reading Doug Noland and Marc Faber who shorted Treasuries got killed.
People betting on "Peak Oil" and the end of "suburbia" and the "3,000 mile salad" like Jim Puplava, Chris Martenson, James Kunstler lost huge.
Entire fortunes were nearly wiped out for guys like General Jim and Rob McEwen who bet heavily on the shares of their own gold companies, and got "Bre-X'd".
Pretty much the exact opposite happened.
- Consumers are stronger than ever after going 3 years without paying a mortgage.
- The U.S. Dollar is the king of all currencies.
- U.S. stocks have outperformed virtually everything, except U.S. Treasuries.
- The ongoing 35 year bull market in Uncle Gorilla Paper keeps going, no end in sight. By far the strongest asset class in years.
- Commodity prices have been crushed, inflation is low, inflation expectations are even lower.
- TBTF banks are even more powerful, bigger, and enjoy unlimited Fed support. Their executives like Sandy Weill remain among the richest in the world.
- Instead of "Guns, Gold, and a Getway Plan", consumers are still stampeding the stores for the latest iPad, iPhone, or Nike shoes.
In a nutshell, the optimists ended up enjoying another year of happiness and continued gains in dividend stocks and Treasuries.
The "Doom and Gloom" crowd continues to hunker down in bunkers, waiting for the crash that never happens.
Ummm, Chris Martenson states that he's 75% in physical gold and silver. The rest in cash, scattered around various institutions and outside the system.
Not sure how that amounts to losing huge. What was gold's return this year? What was the S&P? Nuff said.
To your point, the LT TSYs did have a phenomenal year. Repeat in 2012?
TSY's had a fab year because the entire rest of the system is crumbling ...Robotoady forgets that ..if he wore any thicker blinkers all the lights would go out
hey, R_T!
merry tomorrow!
[...cue mental image of robo daintily stepping over cadavers of formerly-betting bears to see if santa ate the cookies...]
Robotosser - actually my last 2 US stock index shorts paid off quite nicely thanks
I've got one more to go shorting US real estate which news this week the sales figures were Govt massaged by a whopping 20% on the rose tinted spectacles side (Opps!)
How's the unemployment and food stamps cue going mate? Bit of a contrast to the bankrupt WS bankers swimming in (other peoples) money isn't it? JP Morgan make nice fat profits administrating increased food stamp cues, that socialist system really works a treat for the few in bankrupt CONgress and WS banking
Sure yeah there is lots to be optimistic about, keep on being "optimistic". Things are great, never better. You just got lucky, one day your optimism will cost you dearly. I don't blame anyone for being cautious or even paranoid. Nobody knows exactly when this juggling act is gonna end, but it will, i promise. Good for you glad you were able to pull in some clownbucks, but if i were you I would be at least putting 10% away for a rainy decade maybe 4. Good luck to you in 2012, luck is what you will need.
The "Doom and Gloom" crowd continues to hunker down in bunkers, waiting for the crash that never happens.
RT, you must of been rubbing yourself off last night watching crusty the clown of CNBC Bad Money segment. :)
Robotrader,
I appreciate your fortitude in continuing to post.
Yes, the ponzi has kept itself alive and appears strong, just like the Titanic 10 minutes before collision with a giant submerged iceberg, or the Third Reich before it attacked Russia (as if Napoleon had never failed).
We need Napoleons and Crew members in the Crow's Nest w/out binoculars for the other side of the trade.
Timing is everything.
Best of Luck.
I don't know the exact numbers, but we had something like a 10% increase in national debt for a 1% increase in GDP. Now that's negative feedback.
Your problem is that you're very happy to use a shrinking measuring stick: the US dollar. As the reserve currency it is a natural safe haven, so other currencies drop RELATIVE to the buck. To understand what's really happening you need a better currency, and what better currency than God's own? Gold.
I suggest you measure everything in terms of gold and you'll see a VERY differnt picture. And this is with the Fed manipulating the price of gold down so it doesn't rise too quickly. Through these spectacles you'll see a world deeply mired in depression and getting worse.
However, before you drink any more of Uncle Benny's Koolaid you should find out whether he's using Ken Kesey's or Jim Jones' recipe.
tell 'em robo trade. robo trade is back and in the BLACK!
red is dead. we are looking at lean, mean and GREEN for ever.
robo - pick me some winners. i like fundamentals - bac and citi. too beat up. maybe even jefferies, they got picked on for no reason. friends tell me nobody got cash bonus at jefferies - but so what? i'd be loving getting stock. and GM. oil at 110? no worrys. got to be good for the airlines (amr was mismanaged).
i just don't understand why they keep trying to push the unemployment numbers down - because we know unemployment is GOOD - more time to shop and justify not making a mortgage payment.
bernake for noble in economics this year, he's a lock.
And soaring Treasury values and plunging yields are a sign of what again? "Uncle Gorilla" did you call him? That sounds about right to me. I say "expect all hell to break loose" as the "masters of chaos" have taken charge. Have a Happy Holiday Robot, you're one of the best here.
yep, that's why they call it lala land...........
you better not let akak hear you talking all of this smack robo twit.....
Say What? US dollar the king?
I see you tossed in the word "virtually", I suppose meaning "almost". Is that your hat-tip to gold? Pussy.
Kyle Bass predicted the housing bust and doom and gloom and made a fortune. PIMCO and Bill Gross have been on both sides. Things were sailing forever in Sep 1929, Oct 87, Germany 1921, oh, yes, USA and world 2008 with predicting housing appreciation of 8% per annum...blah, blah, blah. Economics is about action, reaction and government intervention. They are hard to time, kind of like predicting the weather. However, we understand what causes hurricanes. We're just not good at when and where.
Who can tell if Robot Trader actually believes any of this?
Precious metals are the only bull left. 11 years strong. Now with negative real interest rates, central bank fiat printing and gold buying, and the financial system on the verge of catastrophe once again, the case has never been stronger.
BTFD.
"The "Doom and Gloom" crowd continues to hunker down in bunkers, waiting for the crash that never happens."
Yeah, re-read ALL of history and now note that you're completely right- crashes NEVER happen! Fuck me!
Thanks for setting things straight!
BTW - May you continue to enjoy the wonders of positive feedback loops throughout the new year :-)
The 10 quick fixes should begin by banning Santa Claus. since Santa no longer represents the true meaning of Christmas. Santa now represents free gifts, more debt, consumerism, peer pressure , elitism, greed, and bearded Ben Bernanke as the ultimate savior for all this behavior. Otherwise, go have yourself a Merry Merry Christmas now---- for tomorrow we will face reality.
Not to be a Scrooge on Christmas, but add the debt to these lousy employment charts.
Jobless Claims and General Employment Trends – The Bigger Picturehttp://confoundedinterest.wordpress.com/2011/12/24/jobless-claims-and-ge...
Any economic and financial system which requires growth to sustain and stabilize it is shit out of luck this decade, IMO. Further, the article states that global sovereign debt has swelled from $18.2T to almost $40T. Simple question - that extra $20T which was presumably spent into the economies of sovereign nations - where is it? Who's got it? And aren't they filthy richer by roughly that amount, compared to 2001?
we may have ate, drank, smoked, burned, and wore out/used up various amounts along the way, too
but we probably securitized it all first and discounted it and sold it, and hypothecated it and re-hypothecated it, and so on
so i see your point
WHAT DEBT, there is nothing wrong with the USA!!
When a boost to retail is needed, they just wheel out the old heroes.
This should be good for a bounce or viewed another way, what chance does the USA have.......zero.
http://www.bbc.co.uk/news/world-us-canada-16323666
I think a spiral in one direction would be a positive feedback loop, like what happens when you speak into a microphone in front of a speaker. Did anyone else notice this or can someone clear me up on this?
I just keep thinking about the title when reading the article... bothersome.
http://www.youtube.com/watch?feature=player_detailpage&v=yMqdUFfxhNI
Is that bothersome enough for you?
Yes, I explained that above.
Not to be a pill, but he's got his feedback terminology wrong. Negative feedback means that the feedback is opposite of the original change, which tends to stabilze a system. Positive feedback reenforces the system's behavior, making it unstable. Positive feedback in an economy can go up (bubble) or down (recession/depression).
He makes his point anyway.
Their is NO European debt crisis, this whole myth has been invented by right wing lunatic republicans, enjoy the good life away from right wing wackos!
HA! Top that Mr. MillionDollarBonus!
Is is possible that Japan, at 200%, can be the model for other developed countries with the ability to print? Kyle Bass has bet it can't go on too much longer, but the Nikkei and bond market, except for a few Fukushima weeks, doesn't seem alarmed.
The red nations in this article are in uncharted modern debt terrirory, but if 200% debt-to-GDP doesn't crash the Keynesian gameplan, what is the limit?
I would think Japan tumbles before 300%, and probably before 250%. I would also think that once that limit has been reached in this live Keynesian test, that #2 would crash before reaching the soon-to-be established limit.
The short Japan bond bet is the easiest in history if you can time it.
Let me continue, Japan has continued because only 5% of it's debt is held outside of Japan. Japan is getting old fast.
I didn't get through the whol;e thing, and sorry, but much of what happens comes from the demonization of deflation, whyich shoudn't, that causes the neg feedback loop. what I find interesting, and it fits in with yoiur statement about most economists not being able to see a crisis. is as follows. deflation gets the blame for what should be described as over expansion of credit. deflation is the chemo therapy for over expansion of credit, but gets the balme as casue and not cure. ther4 are huge reasons for this interpretation, but mainly it is bankers controlling policy to make sure a poloicy that causes losses for them never gets adopted.
I will say this with 100% certainty, having read almost every papaer on deflation. economists have it wrong on this. period. it also ties into the recent articles by talib. how the central benk by fighting deflation (my words they say making the system more atable) in the long run make shte system unstable.
Cohens' 'Outdated approach?' -vs- 'Better approach?' is illustrated by endowment funds [No.1 rule: not lose money] investing more in the 'betters.'
I notice the Yale 'classic alternate investment' model lost 24.6% in 2009 - due to "a few years of extreme volatility."
http://www.yale.edu/investments/Yale_Endowment_10.pdf
Aren't high volatility markets increasingly the norm. Doh!
http://deanhenderson.wordpress.com/2011/12/06/newt-gingrich-lockheed-martin-manchurian-candidate-2/#more-1546
newt gingrich, the chosen one .........
Check out the Steveo 2012 Telescope Project, not just for Astro-freaks!
Really good Scope, I put up a video collage of moon shots, and some picture of Saturn and Jupiter.
Also, fully $1000 over budget, so any Christmas Kliks are appreciated!!
http://oahutrading.blogspot.com/2011/12/perspective-via-telescope.html
Oookkkaaaayyy ... but only if it helps civilization get over the current debt crisis ..
http://voyager.jpl.nasa.gov/
they have gotten some amazing shots, of saturn etc by these two space craft that are now just getting out of our solar system. launched in 1977 they have been on going now for over 33 years...........they are destined to explore the milky way galaxy forever..........
http://hubblesite.org/hubble_discoveries/hubble_deep_field/
hubble deep space mapping continuing .............this probably will be going on forever.........
one example ...........andromeda galaxy. it takes over 2,000,000 years for the light to get to the earth from this galaxy and yet is one of the nearest to us......
the distances are enormous and any star trek activities by humans will probably never happen........
Psalm 141The fool hath said in his heart, There is no God.
I'm having difficulty getting past the author's weird decision to give a chart of (obviously clueless and/or disingenuous) IMF fiscal forecasts such a prominent position in his article.
If the IMF is willing to admit that the U.S. is right behind Greece in Figure 1, I'd use it too.
Don't forget, the IMF has to be truthful about some of the tragedy in order to steal money from taxpayers to "solve the crisis".
Just wait, when it is time for QE5ive after the election is over, the BLS will "suddenly" discover that real unemployment is 19%.
pi-rats in good standing know
when in doubt, give BONER BEER
http://www.boner-beer.com/
Merry Christmas Slewie. Best wishes to you and your family, in 2012!
I especially liked this one: http://www.boner-beer.com/Images/CoolPix/288.jpg
Have a great holiday you rat!
Something unusual happening in Europe right now:
http://sherriequestioningall.blogspot.com/2011/12/email-sent-out-by-roger-weigand-trader.html
I'm ready to " Front Run" , Jan. 3 , 2012!
Boner Beer BANNED COMMERCIAL
My theory, since everyone left here has one theory is we, as the US especially, and maybe a larger web have one last chance at introspection. The EU is going down, 95% percentile. Japan will follow but timing is very difficult. At that point, there's going to be a nasty recession where the US has a choice. Introspection and a new way. Or a few more years. My hope is that the next down leg is so nasty and so disturbing that a few people die and we start re-evaluating. If not, I don't like what's coming when resources get scare and populations get large late decade. Take it now or take it in spades later.
Nothing indicates we are ging anywhere but down econimically. It's just how far and if we admit we have a problem.
Get long usd/jpy Homer! You will "Thank" me this time next year.
Slewie? Some Table Muscle " Fat Dude ", popping a Boner? Have fun with it, but it is still boring.
I love ya too Death. Been There done that >
Evjoy Slewie. http://www.nubiles.net/jody.html?coupon=1149244
Gotta admit, not the worst idea I've ever heard.
Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value.
no open thread tonight?
Ron Paul 2012
When will the market finally push those japanese yields up ... Shorting Japanese bonds could become the new Big Short, the trade of a lifetime.
http://www.theimperatore.blogspot.com/
Not yields C_E. Although JGB's will yield higher. Japan will diversify into " JUNK", sovereign debt.
YES!!!!!!!!!!!!!!
http://www.youtube.com/watch?v=mcalTCVyO7Q&feature=related
Don't mean to sound negative here, but this is not a negative feedback loop. This is a positive feedback loop. I know the word negative sounds like it should be applied when things are getting more and more negative, worse and worse, but that's not how it works. Anyone who does engineering and actually works with/designs equipment with a feedback loop will confirm this.
In a negative feedback loop, negative outcomes would some how bring about corrections that would cause things to go toward positive or things getting better. Negative outcomes, which reinforce and cause more negative outcomes is a positive feedback loop. A positive feedback loop is very unstable and will essentially destroy itself. Kind of what we are watching now in the world situation.
A negative feedback loop is where any outcome, causes the opposite applilcation of force to the system to bring about a correction. For example, if a commodities firm went bankrupt, a negative feedback loop, would insure that all customers got their funds and property returned to them. If any principles of the company had violated the law, the appropriate regulatory agencies would step in and and company officers would go to jail. All this would make the system move back toward being stable.
What has happened with MF Global is a positive feedback loop, and likewise what is happening across the world's markets and politics is the same. Corrective forces have been removed and replaced by outcomes that continue the trend. Positive feedback.
Are we slaves to Debt?
7 minute must watch summary on Debt, historical use of virtual money, gold, and jubilee.
http://www.youtube.com/watch?v=nOBeHwyVKJs