Two methods, same diagnosis
Karl Denninger calculates how much excessive credit exists in the US economy:
In other words, all of the economic pain that the global economy has been through over the last four years is about one-tenth of the amount that is eventually in store for it. Contra most observers' perceptions, the situation is not getting worse, and at least in the United States it has objectively gotten a little better. The problem is that the situation was much, much worse, and orders of magnitude larger, than anyone who wasn't looking at the debt figures realized. While it may be shocking to learn that there has been no real economic growth in the USA since 1980, a coldly analytical look at the shabby state of the national infrastructure tends to support the statistics.
[T]here is no recognition here or elsewhere that the problem is overspending compared to taxation, and counterfeiting credit into the economy by private banks. That's what led to the mess in the first place and nothing has been done to withdraw that excessive credit -- indeed, the distortions to maintain that excessive credit have become extreme as the market would otherwise force it back out all on its own! How bad is this? In the United States alone it's $37 trillion in size, or about 70% of the total credit in the system today! How did I compute that? Simple -- I added up the "extra" credit between GDP and credit growth in the below chart from 1980 to 2008.Those who have read RGD know that I use a different method, which is the Z1/GDP ratio. It is a little more accurate than Karl's method, being inherently more up-to-date, but it is better seen as a supplement to his method than a substitute. Z1 is presently $54,134.3 billion, which is currently 3.5x more than the $15,454 billion GDP. So, after four years of economic stagnancy, the debt ratio has marginally improved from 375 percent down to 350 percent. (Note that by my method, we can see that about 10 percent of the $37 trillion excess calculated by Karl has already been eliminated.) Since the historical post-Depression norm that the economy can sustain is around 150 percent, this means the amount of excess credit currently present in the system is around $31 trillion.
In other words, all of the economic pain that the global economy has been through over the last four years is about one-tenth of the amount that is eventually in store for it. Contra most observers' perceptions, the situation is not getting worse, and at least in the United States it has objectively gotten a little better. The problem is that the situation was much, much worse, and orders of magnitude larger, than anyone who wasn't looking at the debt figures realized. While it may be shocking to learn that there has been no real economic growth in the USA since 1980, a coldly analytical look at the shabby state of the national infrastructure tends to support the statistics.
Labels: economics
107 Comments:
Honey, I have been reliably informed by several different sources in the MSM that the recession is over.
I'm confused about how you came to the conclusion that there has been no real economic growth in the US since 1980.
Read Karl's linked post and look at the graph. The "growth" is all debt-funded pretend growth.
Real growth vs bubble debt economy I.e. housing.
Japan has lost two decades and is well on its way to a third... Comparing their issues in the 90s to the issues the US faces today... its simply staggering.
Someone is going to have to accept that there is no choice in this matter. The debt must be purged one way or another. It will happen. We can either wait 20 years in ever worsening stagnation... or we can bite the bullet now.
With unemployment blipping up.. you know QE 3 is right around the corner. You can hear the printing presses heating up already... perhaps we should be hoping that this time they push it to far and really do kick off the cycle that leads to hyper inflation. At least that would be the quick death.
Pretend growth ostensibly funded by taxes imposed via pretend law. It's SNAFU.
I do hope the containment shield fails sooner than later as, at my age, I'd like to darkly enjoy it all.
[T]here is no recognition here or elsewhere that the problem is overspending compared to taxation, and counterfeiting credit into the economy by private banks.
Isn't Karl talking out of both sides of his mouth here? I mean doesn't excessive spending by the government (which is what Karl is always defending) necessitate, or at least enable, couterfeiting credit into the economy?
I don't get the impression that KD supports excessive spending by FedGov. He seems to always say the government shouldn't spend more than it collects in tax revenue. The question of how much to tax is what can and should be debated.
... well, the question of how much to tax, and what to spend those tax dollars on, is what can and should be debated.
wait... Denniger defends excessive government spending? Don't get me wrong... I can't stand the guy and generally find him to be profoundly stupid on a great number of subjects... but I didn't really think he was Keynesian in that sense.
On the other hand... I haven't been able to force myself to read his god forsaken page in over 6 months...
I have been trying to get my mind wrapped around all this and I am beginning to think it's impossible for me.
I have talked to people and every person I talked to doesn't see a problem. They always say "Well, they can print more money.. We won't ever run out of money. Nothing wrong here."
I do not relish the thought of a currency collapse. It will be used to enslave us, I think. So why are so many people here looking forward to this?
I do not recall Denninger ever defending excess government spending. As someone above pointed out, he insists that government ought not spend more than it collects in taxes. He has never advocated high levels of taxes either.
wait... Denniger defends excessive government spending?
I really don't know. Since I don't really keep up with them, I always get these economists mixed up. Probably my mistake.
wait... Denniger defends excessive government spending?
I really don't know. Since I don't really keep up with them, I always get these economists mixed up. Probably my mistake.
I don't think he does it per se. He is certainly against deficit spending, but he tends to think that spending is ok as long as you keep taxes high enough to support it or keep spending low enough to stay within a budget allowed by a sustainable tax rate. He also falsely believes that the GDP calculation is an actual mathematical formula that accurately reflects the real world (e.g. he repeatedly states that any reduction in gov't spending will result in a real recession because of the math (GDP=G+C+I-(X-I)), but ignores the problems with the GDP calculation. Further, he derides the value of gold-based monetary system and foolishly claims that a "$1 of capital" law (his version of 100% reserve banking) would cure our FRB debt problems at the same time as he posts example after example of the big banks willfully breaking law after law and escaping any consequences. Sure, elimination of FRB would be a good thing, but merely passing a law would not do it. You actually have to enforce it. In short, he correctly identifies many of the problems, but his solutions tend to be inadequate or wrong.
"I have been trying to get my mind wrapped around all this and I am beginning to think it's impossible for me.
I have talked to people and every person I talked to doesn't see a problem. They always say "Well, they can print more money.. We won't ever run out of money. Nothing wrong here."
I do not relish the thought of a currency collapse. It will be used to enslave us, I think. So why are so many people here looking forward to this?"
Try this: when you max your credit card, you can always phone the credit card company and try to have your credit limit increased. Or else you can get another card. It is even possible to pay one card with another in a series of credit-shifting operations for a few years. but one day one of the companies will refuse to increase your limit or refuse to give you a new card. At that point, you are screwed.
With unemployment blipping up.. you know QE 3 is right around the corner. You can hear the printing presses heating up already... perhaps we should be hoping that this time they push it to far and really do kick off the cycle that leads to hyper inflation. At least that would be the quick death.
The purpose of the Fed's interventions (since 2008 at least) has little to do with it's stupid dual mandate (high employment and stable prices) and everything to do with buying time for its member banks to deleverage. Bernanke does not care about deflation or inflation per se, what he cares about is the ability of the TBTF banks to weather whatever economic conditions exist. Passing bad bank debt off to the public, ZIRP policies that allow the banks to shore up their balance sheets by earning interest on the spread, Maiden Lane type purchases, etc. all support this goal. Of course, the Bernank also has to manage the Treasury market so that the politicians can keep spending. Otherwise they might come after him and the Fed.
While it may be shocking to learn that there has been no real economic growth in the USA since 1980, a coldly analytical look at the shabby state of the national infrastructure tends to support the statistics.
Do you really believe this? I don't. The reason I don't is very simple. Ask people if they would prefer to live in 1980 or now. I'm confident that not just a majority, but a large majority, of people will choose now over 1980. And not just because of any sort of bias, but because people can see very clearly that their lives are materially better today than in 1980.
Statistics can be misleading, particularly because the inflation statistic is largely over stated. It is overstated because it does not capture, nor does anyone really know how to capture, quality improvements or products. Don Boudreaux does a fine job showing how much lives have improved since 1975 (I know, I know, that's five years before 1980).
And not just because of any sort of bias, but because people can see very clearly that their lives are materially better today than in 1980.
Would they be better off if they were forced to pay off their share of the national debt now versus in 1980, plus the average increased private debt? You aren't understanding the nature of the problem.
And don't confuse technological change for economic growth. Would you rather date Kylie Minogue in 1980 or 2012?
Looking at his chart, I'd say a better estimate is that there's been no growth since 1998. Bretton Woods lasted from 1945-1973 and the imbalances between Europe and the US broke the system. Inflation chewed up debt and U.S. gold holdings accounted for more than 100% of M1 at the peak.
The Asian Crisis hit in 1997 and that should've broken the system again. But Fed printing was swamped by China, which doubled down on the Asian model. The global economy, instead of resetting, hit repeat.
Additionally, the average house size has increased by 70% since 1970 (1400 sq ft in 1970 to 2700 sq ft today), while the number of people per household has decreased from 3.14 to 2.63, a 16% decrease.
This means that the average sq ft per person in the last 40 years has gone from 445.86 to 1026.62, a doubling of living space in just 40 years.
Vox,
And don't confuse technological change for economic growth.
Seriously? Technological change is the driver behind economic growth. I don't see what talking about Kylie Minogue 1980 vs today has to do with economic improvements. Can you expand this to explain why you think this is important when talking about economics?
Ken June 07, 2012 9:45 AM :
I'm confident that not just a majority, but a large majority, of people will choose now over 1980. And not just because of any sort of bias, but because people can see very clearly that their lives are materially better today than in 1980.
Silicone implants come to mind here...
This means that the average sq ft per person in the last 40 years has gone from 445.86 to 1026.62, a doubling of living space in just 40 years.
amazing what artificially cheap money and housing subsidies create! it's almost like those silly austrians were right about all that business cycle theory...
I will add that even the TBTF banks are leery of too much of the borrow short (ZIRP), buy long (treasury) trade due to the interest rate risk they incur. Hence we now have 1.5 trillion dollars in excess reserves belonging to the TBTF banks sitting at the FED (IIRC they still get .25% on excess reserves). Meanwhile, the FED has taken great pains to announce that ZIRP will continue for the foreseeable future ("guaranteed" through the end of 2014 for now)to reassure the banks that the interest rate risk will be contained for that period at least. This also has the effect of creating buyers for the short term treasuries that the Fed has been selling as part of Operation Twist (sell short term, buy long term treasuries). Of course, while the Fed is trying to shore up their balance sheets, the TBTF banks feel more confident in taking bigger risks in derivatives markets (see, e.g. J.P. Morgan fiasco).
I think the end comes, not as a Fed decision to print to infinity, but as a sudden collapse of credit that the central banks cannot print fast enough to contain. After all, there is plenty of liquidity in the system since Lehman and liquidity is the only thing that Fed printing can affect in the short term.
Nate often talks about his view that the leveraged debt can evaporate without changing reality and that what matters is the money supply (roughly M2). He has a point, but what I think he misses is that what he is describing is a massive debt deflation. Even with an M2 of around 9 trillion, it would have to increase massively to take the place of the 54 trillion in debt dollars that are currently out there bidding on goods and services.
Ken, you're missing the point. Imagine that I give you a credit card with a trillion dollar limit, and tell you that you don't have to pay the bill. Five years from now I ask, "Hey Ken, would you rather be living today with your "free" credit card, or five years ago without it?" What will your answer be?
Even with an M2 of around 9 trillion, it would have to increase massively to take the place of the 54 trillion in debt dollars that are currently out there bidding on goods and services.
A dollar is a dollar, whether that dollar comes from a checking account, loose change, or a visa card. It can all be used to pay for things, from a cup of coffee to a basket of synthetic cdo tranches.
Ken, I'm glad you brought up some of those points, because they are worth considering in the general concept of growth, but they don't account for the fact that those relatively lower prices are, if not the outright result, are certainly seriously affected by the debt explosion.
I disagree with Vox that technology change has no relation to economic growth because tech changes can affect how people value certain goods, but such change is no where near as relevant as a population's debt is. Debt is the gorilla, tech change is a flea on his shoulder.
In other words, if there wasn't so much debt in the system right now, you would not be seeing the 1975-2012 deflationary impact of the "Sears Catalog" variety. It's a facade of "better."
"I'm confident that not just a majority, but a large majority, of people will choose now over 1980. And not just because of any sort of bias, but because people can see very clearly that their lives are materially better today than in 1980. "
Oh FFS...
This again?
Technological advancement has nothing to do with inflation. You're looking at all the stuff you have... and ignoring the fact that you've never bothered to actually pay for it.. and the paying has to happen.
the massive amount of inflation in the last thirty years should lead every middle and working class american to get on their knees and thank god for sam walton. walmart is the main reason that the standard of living for most americans has not collapsed.
Josh,
amazing what artificially cheap money and housing subsidies create
The improvements in housing quality and size or economic improvements nonetheless. They are increases in wealth. Yes, debt is larger, but money is a representation of wealth, not wealth itself. It really is an irrefutable fact that people are more wealthy today, on average, than in 1980.
I used housing as an example, but there are plenty of others that are not driven by subsidies. Retail (the driver of the 90's boom) and information technology comes to mind.
... but such change is no where near as relevant as a population's debt is.... It's a facade of "better."
I disagree completely with this statement. I'd be interested to know the per capita debt to income ratio are when comparing 1980 to 2012. I think this is more relevant than simply computing absolute debt for 2012 and comparing it to absolute debt, accounting for inflation. Even if this ration is somehow "worse", I don't think this means that we are economically worse off.
As an example of this consider my grandfather and my uncle. My grandfather had three heart attacks between 1965 and 1970, with the last one killing him at the age of 51. My uncle, 25 years later and roughly the same age as my grandfather when he had his first heart attack, is now alive and well and almost 70 years old. This has to do exclusively with technological improvements in medicine. Whereas my grandfather's medicine was bed rest, my uncles was a stint and medication. I'd say that 20 years (and counting) of extra life is worth a little extra debt burden.
The second quote in my above comment is in response to Daniel, not Josh.
Nate
"Technological advancement has nothing to do with inflation. You're looking at all the stuff you have... and ignoring the fact that you've never bothered to actually pay for it.. and the paying has to happen."
Although I wouldn't go so far as to say "nothing to do with inflation", as it is fairly obvious that tech change during a heavily indebted period leads to an artificial drop in prices and the illusion of deflation ("Gee, my transistor radio that I bought in 1968 cost me a week's pay back then while my ipod only cost me one day of debt today! Yay deflation!"), that when comparing two economies on the timeline, Nate's comment is dead on.
I think some can get confused when they don't buy things on credit - they don't realize that because so many others are, the prices are artificially low. [In other words: "What do you mean, I didn't actually pay for my kindle? I paid cash!" is the wrong answer, when 9 people behind you are paying credit + interest rate + default rate + obfuscation.]
Nate,
You're looking at all the stuff you have... and ignoring the fact that you've never bothered to actually pay for it.. and the paying has to happen.
If I bought something on credit, that means I, personally, have not paid for it, but at the time of purchase, someone did pay for it: some depositor at the bank through which I have my credit card. I have to pay him back, with interest, but the paying for that product has indeed happened.
"walmart is the main reason that the standard of living for most americans has not collapsed."
Wow, haven't heard the "slavery is good for the economy" argument for a while now.
You just transferred debt. And there is a whole lot of it going around. Off to work to earn some debt instruments.
Ken,
No one is being paid back because a Federal Reserve Note is a debt instrument. The Federal Reserve cannot print money, it can only issue FRNs in exchange for debt. It therefore looks as though it is "printing" money since the money supply (money+credit) is expanding, but the debt has only shifted onto the central bank's balance sheet. You personally can be conducting business in a sound manner, but you are floating in a sea of debt. You are being paid in other peoples' debt and you are spending it when you buy things.
If I bought something on credit, that means I, personally, have not paid for it, but at the time of purchase, someone did pay for it: some depositor at the bank through which I have my credit card.
Nope. That's the problem. The bank didn't pay for it either. The bank gave the seller some currency/credit.
Do you really believe this? I don't. The reason I don't is very simple. Ask people if they would prefer to live in 1980 or now. I'm confident that not just a majority, but a large majority, of people will choose now over 1980.
People who make and sell pretty baubles have a vested interest in convincing their marks that they are better off with more pretty baubles.
(Bread and circuses ...)
The biggest implication is that the inflation already happened! That chart shows the inflation. Prices rose for commodities somewhat, but much of the debt went into financial assets, holding prices low. The market forces want to sweep away the debt and push down asset prices, not inflate commodity prices.
Hyperinflation would first require restarting the system and growing debt. Next, the government would have to actually print money. A major war would be a good excuse to directly credit bank accounts with money without collecting taxes. If there's no war, the government will have resort to printing money by bypassing the Fed, and it needs to fill the hole just to get back to even.
I think this is the devil in the details of the NGDP targeting plans. NGDP targeting would eventually "grow" the nominal economy to a level where it could sustain the debt, but it requires a non-debt method of increasing the money supply.
walmart is the main reason that the standard of living for most americans has not collapsed.
Didn't you mean to say that the Chinese are the main reason that the standard of living for most Americans has not collapsed?
I wonder what will happen when they refuse to be our slaves any more.
Wow, haven't heard the "slavery is good for the economy" argument for a while now.
Did I say "the economy?" No, dipshit, I said, "standard of living." Learn to read.
Using data available from the BEA and the Fed:
Median income (for all men >15 with non-zero income) 1980: $12,530. 2004: $30,513. This is a 144% increase in nominal terms.
Total credit market debt (Z1) 1980: $4,726 billion. 2004: $38,638 billion. This is an increase of 717% in nominal terms over the same period.
This period even leaves off the post 2004 spike in debt to over 50 trillion.
Israeli soldiers protect America too
Ken
As an example of this consider my grandfather and my uncle. My grandfather had three heart attacks between 1965 and 1970, with the last one killing him at the age of 51. My uncle, 25 years later and roughly the same age as my grandfather when he had his first heart attack, is now alive and well and almost 70 years old. This has to do exclusively with technological improvements in medicine. Whereas my grandfather's medicine was bed rest, my uncles was a stint and medication. I'd say that 20 years (and counting) of extra life is worth a little extra debt burden.
Ken, I really appreciate your thinking here, even though it is wrong. You articulate what in effect is a side issue mostly unrelated to the massive problem of debt very well, and it is an important one to bring up, because a lot of people think the same way.
You provide the bullet that kills your own idea right at the end, and I appreciate that as well:
"worth a little extra debt burden."
Setting aside that "little" is a wildly relative term [considering that "little" burden is now (by any measure, but I'll just use the per capita one, even though it underguesses debt by a lot) 181% of per capita income, as opposed to what was then a ghastly 53% in 1980] you strike the root of your argument with a single word:
"worth"
Accepting your assumptions that it was our debt-fueled economy that provided your uncle's longevity, at what point would it have not been worth it? What if his medical advances had come at the result of impoverishing his children and their children for the rest of their lives (and thereby shortening them in exchange for his heroic measures)?
In other words, is there any point where the debt tips away from your uncle's favor? Let's say he could have completely "free" care, and a guaranteed 90th birthday, but it indebted the next six generations of his descendants? Seven? Eight? At what point does that "little" burden crush enough people to say, "No. Although his life is of immeasurable worth, the debts of his children are measurable."
It is perfectly fine if you say, "No. Cost was no object. It was worth it."
But then you can't possibly say that things are better today than they were then: debt has fractured the real measurement of consumer goods, so comparing catalogs without acknowledging the debt is like suggesting 2 Buck Chuck is better than a 1945 Mouton without acknowledging that the Mouton was opened a month before.
tubman,
Wow, haven't heard the "slavery is good for the economy" argument for a while now.
Ha! Now voluntary trade, including trading labor (e.g., working at Wal-Mart) is equivalent to forced enslavement. Excellent!
Joshua_D,
The bank didn't pay for it either.
I didn't say "the bank" paid for it. I said a depositor at the bank paid for it.
The other skeptic,
People who make and sell pretty baubles have a vested interest in convincing their marks that they are better off with more pretty baubles.
No one forced anyone to buy anything. Just because you disparage some bauble and find it worthless, doesn't mean others do. I know some people who think it's ridiculous that I have an iPhone and disparage it as a "bauble". But the reality is that I value that iPhone more than the $200 I paid for it and I find the service I get from it worth more than the $90/month I pay for it. My life is improved by buying these "pretty baubles".
In other words, by definition when people pay $X for Y, they value Y more than $X. Their lives have been improved by that trade.
Didn't you mean to say that the Chinese are the main reason
Does it matter? If my living standards haven't collapsed because I trade with Mr. Li in China rather than Mr. Smith down the street, the reality is that my living standards have still not collapsed. Distinguishing between with whom trade takes place is a standard fallacy people make when thinking about trade.
Ken
You're confusing standard of living with economic growth. They are not the same thing and their relationship is very... very complex.
"Does it matter? If my living standards haven't collapsed because I trade with Mr. Li in China rather than Mr. Smith down the street, the reality is that my living standards have still not collapsed. Distinguishing between with whom trade takes place is a standard fallacy people make when thinking about trade."
Yes. It does matter. Because its only the chinese slave labor that allows you to keep buying more stuff with your ever inflating currency.
You're neighbor isn't a slave... and thus trading with him would be a great deal more expensive... and thus you would not be able to buy nearly as much.
Ken,
I didn't say "the bank" paid for it. I said a depositor at the bank paid for it.
Nope. A depositor didn't pay for it either. The depositor still has access to his money in the bank.
Your views simply do not factor in fractional reserve banking system we have today.
In any case, would you please answer my original question.
Daniel,
You provide the bullet that kills your own idea right at the end, and I appreciate that as well:
"worth a little extra debt burden."
Aren't people entitled to make their own decisions about what something is worth? If I find it worth while to die with a net worth of $50 (Assets - liabilities = $200 - $150, say) at the age of 70, rather than die with a net worth of $100 ($150 - $50) at the age of 51, isn't it my decision to decide whether or not it's "worth" it? Additionally, how many people wouldn't pay 50% of their net worth to live an additional 20 years?
Cost was no object. It was worth it.
I have never said "Cost was not object", nor even implied it. What I am saying is that it may be worth it, however you define "worth" to have a heavier debt load (higher cost), but live longer (benefit).
Let's say he could have completely "free" care
Nor have I implied that debts are "free". In fact, I explicitly state they are not. Whenver I buy something on credit, I explicitly claim that someone else paid for that something.
But the reality is that Ivalue that iPhone
I think we've found your problem...
Nate,
You're confusing standard of living with economic growth.
Am I? The only way for living standards to improve is for wealth to increase (per capita), which is economic growth (per capita).
Josh,
I think we've found your problem...
As I said, you don't get to define what I find valuable, the same way I don't get to define what you find valuable. You can use this type of argument, but you should be aware that it is fallacious.
Joshua_D,
Nope. A depositor didn't pay for it either. The depositor still has access to his money in the bank..
Wrong. The total deposits of all depositors is less than the amount of money any bank has at any time. This is the result of fractional banking. It's why bank runs can occur: banks have less money than depositors have deposited because banks used their money to lend out to others, like me with my credit card.
Ken,
The only way for living standards to improve is for wealth to increase (per capita) ...
Nope. That's not the only way to increase your standard of living. As has been pointed out, you could take on ever increasing debt.
Am I? The only way for living standards to improve is for wealth to increase (per capita), which is economic growth (per capita).
Or...for total debt to increase, to purchase more goods and services...which is what actually happened...
"Would you rather date Kylie Minogue in 1980 or 2012?"
Looks like she would have been 11 or 12 in 1980, so is there any possibility of some middle ground there?
Ken,
Wrong. The total deposits of all depositors is less than the amount of money any bank has at any time.
Ahh ... I think I'm seeing the problem here.
"The only way for living standards to improve is for wealth to increase (per capita), which is economic growth (per capita)."
False.
Think about this...
Ned goes out and somehow manages to get 10 credit cards with 10 million dollar credit limits on each.
Ned goes out and buys 50 million dollars worth of stuff... and starts using the rest of the credit to make the minimum payments.
In a still photo in time... Ned's standard of living has increased by every measure. But there is no economic growth. His net worth is not even 0... its less than zero because of the interest accrued on the debt.
Standard of living is incredibly high... with negative economic growth.
See how that works?
Am I? The only way for living standards to improve is for wealth to increase (per capita), which is economic growth (per capita).
If you buy goods on credit, your standard of living today increases and you must pay it back later. If your growth rate isn't enough to pay the debt, then you are in fact transferring future consumption into the present. In the future, you will have to consume less in order to repay the debt.
Ken, good points. Of course people are free to determine worth. The problem is that, in your uncle scenario, his actions (because of the collective debt) also determine the worth for other people. In other words, eventually the debt comes due. That debt has certainly exploded since 1975 (or 1980, pick your point), artificially lowering barriers for the acquistions of heart surgeries and ipods and houses or whatever, but those debts will come due, and in the meantime, make everyone "feel" as if the Sears Catalog is on a deflationary trend.
So of course houses cost less after a bubble begins to collapse, but that doesn't mean the economy of 2012 is "better" than the one of 2008 (which was itself inflated garbage, but that isn't the point) just because houses are "cheaper" now. The fact that 2012 is "better" than it should rightfully be also doesn't mean that it is also sorted out - in fact, it means that those bubbles just keep blowing on down the line. It's fun to surf on a tsunami until you hit the shore.
Nate,
Your example focuses on a single individual, not the average individual. To say that an individuals living standard has decreased doesn't say anything about whether the average person's living standard has increased.
I think I am not being clear in what I am saying: per capita means the average person, not a specific individual. By focusing on negative assets of a single person does not negate at all that what I've said so far applies to the average person.
I think I am not being clear in what I am saying:
you're clear, just wrong. unless you're just too subtle for us, or we're not reading you charitably enough.
"Your example focuses on a single individual, not the average individual. To say that an individuals living standard has decreased doesn't say anything about whether the average person's living standard has increased."
Ken... you're ignoring the fact that Ned represents the United States as a whole... not an individual person.
When you take the total debt... and divide it by the population... then take total assets... and divide it by the population... you get a negative number. A very... Very... negative number.
Josh,
you're clear, just wrong.
And yet all you've offered me are snide remarks, rather than solid arguments.
Nate,
Ken... you're ignoring the fact that Ned represents the United States as a whole... not an individual person.
And it looks like you're ignoring the other 95% of humanity.
"And yet all you've offered me are snide remarks, rather than solid arguments."
Well in Josh's defense... you've brought a childish, simplistic, out-moded, and utterly laughable line of reasoning and brandished it like it was the latest cutting edge economic understanding.
You suppose that engenders respect?
Ken, you asked:I'd be interested to know the per capita debt to income ratio are when comparing 1980 to 2012. I think this is more relevant than simply computing absolute debt for 2012 and comparing it to absolute debt, accounting for inflation. Even if this ration is somehow "worse", I don't think this means that we are economically worse off.
Using the stats I posted above, you can see that the debt/income ratio has worsened by a factor of 5 (500%) from 1980 to 2004. That increase in debt can certainly raise the standard of living for a while. Until the debt service costs outweigh the increase in living standards, even assuming that no principal comes due. Like Roundtine said, at best, you are merely shifting consumption forward.
"And it looks like you're ignoring the other 95% of humanity."
Further evidence that you cannot differentiate between standard of living and economic growth.
Standard of living is often an externally comparative measure. economic growth is not... its internally comparative.
So yes... I am ignoring the rest of humanity... because the topic is economic growth in the United States.
And yet all you've offered me are snide remarks, rather than solid arguments.
did you read my comment about debt and the standard of living?
Do you want me to break down the decrease in discretionary income, increase in debt and bill payments, rising costs for housing, food, education, energy, m medical services, etc since 1980?
FYI Ken, most everyone has been very charitable with you so far. The snideness hasn't got into gear yet. The snark car is still idling in the driveway with the garage door closed.
driveway ... garage ...
driveway ... garage ... Clearly, you've been inhaling the fumes while waiting to take the snark car out for a drive. At least open the garage door dude.
wait, where is the snark car? if it's idling in the garage, with the door closed, who's trying to kill themselves?
I find it easier to read 'about' Karl Denniger that to read Karl Denniger. Something about his writing style, short paragraphs after short paragraphs, the wide pages, his font, something or other makes him very hard for me to read. I applaud his opinions and his attitude, but I'm not willing to labor over his style looking for nuggets. So it's good to get these reports from VD from time to time.
I find it easier to read 'about' Karl Denniger that to read Karl Denniger. Something about his writing style, short paragraphs after short paragraphs, the wide pages, his font, something or other makes him very hard for me to read. I applaud his opinions and his attitude, but I'm not willing to labor over his style looking for nuggets. So it's good to get these reports from VD from time to time.
"Do you want me to break down the decrease in discretionary income, increase in debt and bill payments, rising costs for housing, food, education, energy, m medical services, etc since 1980?"
But! ... BUT!!!!
I really like my iphone!
FYI Ken, most everyone has been very charitable with you so far.
Meh... If snark's all you got, well, I guess that's all you got.
Metaphor failure is by no means a sign of depression. I'm in an excellent mood.
(There really should be some form of punctuation between "." and "!" Where is the middle ground there?)
Josh,
did you read my comment about debt and the standard of living?
Yes, I read all your comments. Not much to any of them.
Something about his writing style, short paragraphs after short paragraphs, the wide pages, his font, something or other makes him very hard for me to read.
don't forget the random sections of bolded text and the ALLCAPS.
I find it easier to read him when I imagine that he's yelling
I find it easier to read him when I imagine that he's yelling
I always imgaine he is yelling when reading him. It's involuntary, probably because every time I've seen him speak, he is yelling or extremely angry at some point.
FYI Ken, most everyone has been very charitable with you so far.
Meh... If snark's all you got, well, I guess that's all you got.
Question for Ken:
What are the ramifications for living standards and the economy of debt increasing 5 times faster than wages since 1980?
What are the ramifications for living standards and the economy of debt increasing 5 times faster than wages since 1980?
More iphones for everyone!
Stilicho, What are the ramifications for living standards and the economy of debt increasing 5 times faster than wages since 1980?
Ramifications. Ram ... vacations ... rams on vacation ... riding a ram on a mountain vacation ... pretty colors ... did you know that the Dodge Ram icon looks like ...
OT, but here is a really, really strange one. The Navy is claiming that a Fire On a Nuclear Submarine> began in a vacuum cleaner and resulted in $400 million in damage. Does this strike anyone else as just a bit peculiar?
Ramifications. Ram ... vacations ... rams on vacation ... riding a ram on a mountain vacation ... pretty colors ... did you know that the Dodge Ram icon looks like ...
Glad to see you made it to the highway...
Since the historical post-Depression norm that the economy can sustain is around 150 percent
Why did you pick this as normative?
Denniger's issue from what I have seen is similar to the Academic communists in the university system. Despite all evidence of the nature of man he believes that a fiat money system can work if we just try harder, because no other attempts have had the required restrictions that he proposes. Just like "real" communism has never worked, but if we try really hard utopia is around the corner. He sees the ills of the current system but he fails to identify the source.
"He also falsely believes that the GDP calculation is an actual mathematical formula that accurately reflects the real world (e.g. he repeatedly states that any reduction in gov't spending will result in a real recession because of the math (GDP=G+C+I-(X-I)), but ignores the problems with the GDP calculation."
@Stilicho- I don't know if he believes that GDP reflects the real world, but it is a mathematical formula. The nature of his argument, if I understand him correctly, is tautological in nature. There are many Keynesians that claim the government needs to keep borrowing tons of money in order to keep the economy from going into a recession. This argument is tautologically true as a recession is defined as negative GDP growth and because a reduction in government spending is, by definition, a reduction in GDP. Denninger's argument, then, is that any recession that results from reducing government debt is mostly tautological, and more indicative of reducing government waste then actually destroying private capital. Furthermore, his argument for allowing the tautological recession is based on the fact that debt-based growth is actually an illusion, and nothing more than the time preference of demand shifted forward.
Simon, of course it is a tautology, but I have not seen KD address it as such. Perhaps that is what he means, but what I have read is him stating that a reduction in government spending = recession. What I have not read is KD saying that this is a tautology, only that you cannot escape the math. Absent any further statement, the implication is that he believes that G = economic production. I simply have not seen KD make the correct argument that you ascribe to him: Denninger's argument, then, is that any recession that results from reducing government debt is mostly tautological, and more indicative of reducing government waste then actually destroying private capital.
Stilicho, What I have not read is KD saying that this is a tautology, only that you cannot escape the math.
I've visited KD's blog every other day or so since 2008. I've never gotten the impression that KD thinks government spending = economic production. He seems to clearly understand and point out the the GDP metric used is incorrect since G is, in fact, government spending, which is the opposite of economic production.
"Starbuck June 07, 2012 8:48 AM
I have been trying to get my mind wrapped around all this and I am beginning to think it's impossible for me.
I have talked to people and every person I talked to doesn't see a problem. They always say "Well, they can print more money.. We won't ever run out of money. Nothing wrong here."
I do not relish the thought of a currency collapse. It will be used to enslave us, I think. So why are so many people here looking forward to this?
"
There are people looking forward to the destruction of all things currently assumed to be reality but are false. They are looking forward to the return of a more virtuous society and the death of the current selfish short sighted society. They are looking forward to a full societal reset. Regardless of the pain involved.
You may ask why they look forward to it. I've only got one answer. They seek justice.
They are looking forward to the powers that be getting their comeuppance. You are being charitable towards the enslavers. They are riding a tiger right now and I don't think many of them fully appreciate the power of the forces they are playing with. The tiger always tires of being ridden.
I've visited KD's blog every other day or so since 2008. I've never gotten the impression that KD thinks government spending = economic production. He seems to clearly understand and point out the the GDP metric used is incorrect since G is, in fact, government spending, which is the opposite of economic production.
Do you also whip yourself bloody just for the fun of it? At any rate, I will defer to the greater knowledge of you and Simon regarding KD's writings. Please continue to peruse it so that I don't have to.
Why did you pick this as normative?
Because that's what it crashed to after the last depression. It actually reached as low as 135%, but quickly stabilized at 150% and hung around there for the next 30 years. History indicates that the economy can handle that level of debt and still grow.
"What I have not read is KD saying that this is a tautology, only that you cannot escape the math."
Well, seeing as how mathematical formulas are are tautologies, it would seem that Denninger already clarified this but you were too dense to recognize it.
I'm not an economist and don't know how much debt nations can handle. But I know much how much debt an ordinary individual can handle. The answer is- none!
Most people with a big debt live in a state of stress. Even deadbeats, who have no plans to pay anything back, live in a state of stress. They may not worry about it but their subconscious does. They get one of many "autoimmune" diseases that have puzzled doctors for centuries.
Let's say you decide to buy a new automobile. The price is $40,000 and you finance it.
There's an alternative to going that route. If you keep driving an older car and make those new car payments to yourself, you will have accumulated $40,000 in capital. Now you don't have to marry an heiress. You can begin to save yourself the rat race.
I don't mean tying the money up in Roth IRAs, either. I mean keeping your mind alert for opportunities. No matter how well paid the worker, opportunities present themselves mainly to the boss.
So - houses are larger, teevees are cheaper, health care is richer, and the little burden of debt has made it all possible. But wages are lower, unemployment is higher, and the masses are poorer all because of...?
Huh. Put them both together, and you'll solve the puzzle, Ken.
This doesn't even account for the fact that what would now be about 32 million productive adults have been erased, in part directly by debt, over the last 40+ years.
"What I have not read is KD saying that this is a tautology, only that you cannot escape the math."
Well, seeing as how mathematical formulas are are tautologies, it would seem that Denninger already clarified this but you were too dense to recognize it.
What part of me agreeing that it is a tautology did you fail to comprehend? I readily admit that KD may have explained his position somewhere, but to simply throw the GDP calculation in a blog post as if it has some meaning beyond playing with numbers is a waste of time. If you define economic contraction as a reduction of GDP and define GDP as G+C+I+(X-I) of course a reduction in G causes a reduction in GDP all else being equal.
However, statements like this do not follow from that unless you treat GDP as a measure of real economic output:
"If you stop the deficit spending the economy craters (~10% of GDP)"
Because that's what it crashed to after the last depression. It actually reached as low as 135%, but quickly stabilized at 150% and hung around there for the next 30 years. History indicates that the economy can handle that level of debt and still grow.
Does this level have anything to do with the legislation and practices that came out of the Great Depression? Is there perhaps a more normative level? Or is this one something we have no way of knowing because of bad data and 150% is the best guess we have?
1980 vs 2012 Am I more wealthy today? No. I have more dollars but dollars are not wealth. In 1980 I paid $0.50 per gallon of gasoline. Today I pay $4.00 per gallon of gasoline. Even though I have more dollars they don't buy as much as they did in 1980. Real wealth comes from the sun or out of the ground. Dollars are just a medium of exchange.
Joshua_D: "The snark car is still idling in the driveway with the garage door closed."
Stilicho: "Clearly, you've been inhaling the fumes while waiting to take the snark car out for a drive. At least open the garage door dude."
Josh: "if it's idling in the garage, with the door closed, who's trying to kill themselves?"
Obviously, the driver opened the garage door, started the car, drove it a little ways out into the driveway (a little taste of snark), put it in park while he went back and closed the garage door, and is now idling in the driveway waiting to put it into full snark and zoom away.
Gosh, you guys. A more charitable reading would have revealed this subtle distinction in his analogy.
Two methods same diagnosis! Karl posted today: Jim DeMint gets the gold star for the day. It probably just went over the head of everyone in the room on the Joint Economic Committee, but Bernanke didn't miss it. Paraphrased, Jim DeMint said: If you stop the deficit spending the economy craters (~10% of GDP) and if you continue doing it the economy will crater (since you will eventually hit the wall and be forced to stop, and it will be even worse.) In other words, the policies being promulgated are not and cannot be effective. Anyone who claims that nobody in Congress "gets it" is wrong. There are a few people who do, Jim DeMint being one of them. But notice that nobody is talking about taking our medicine and ceasing the lies -- the puerile and false claim that we can "recover" from a debt addiction through yet more debt. That's mathematically impossible, DeMint knows it, and he's said it in public.
Karl is not hard to follow. I want to personally thank ZIRP for helping speed up the collapse. ZIRP and currency debasement such fond memories…..
Ken: Does it matter? If my living standards haven't collapsed because I trade with Mr. Li in China rather than Mr. Smith down the street, the reality is that my living standards have still not collapsed.
It matters if you don't trade with Mr. Li but just give him IOU notes.
I agree with the general outline of your argument (that we should look at real wealth) but you still need to take external debt into account.
Gosh, you guys. A more charitable reading would have revealed this subtle distinction in his analogy.
You know. I like your interpretation much better.
"However, statements like this do not follow from that unless you treat GDP as a measure of real economic output:
'If you stop the deficit spending the economy craters (~10% of GDP)'"
Well, seeing as how Karl Denninger generally writes for an audience that does, in fact, accept GDP as a measure real output, that statement should make sense. Denninger is an advisor to several LP candidates, and has had several meet-and-greet opportunities with other politicians from the GOP. One thing that is essential in addressing flaws in the arguments and belief systems of others is that you engage them on their terms, which is exactly what Denninger does. He's trying to have an effect on policy, and so he must speak to policy-makers on the terms they use (and hopefully understand).
By the way, even if you reject the notion that GDP is a real measure of economic output, it is still generally reasonable to say that there will be an economic contraction if the government ceases to engage in deficit spending. This contraction may not be permanent or even particularly severe, but the general rule is that once s significant portion of spending ceases, the economy takes a little while to reorient itself to real demand, mostly because people are not perfect, rational actors. As such, sudden decreases in spending, in whatever capacity, generally lead to a reorientation of production.
Well it's about time a house has dropped on the wicked witches of the east and the west and we take their silver slippers. Greenbacks baby!!!
When the bankers controlled the gold standard they screwed us then with feast and famon buying assets at pennys on the dollar. Now the bankers controll the fiat money and they screw us now by setting savings and inflation rates. Perhaps the housing bubble has finally dropped on these shister bankers head and we can now return to government issued greenbacks without debt.
There is only 1 trillion in real greenbacks vs the 14 trillion bonds as US debt so I am hoarding mine (except for Keystone beer). And if fractional reserve lending is really 10% then there is 150 trillion in bank debt, not Vox's 30 trillion. Add in hedges and swaps and its probably 150 gazillion billion trillion all on bankers and gold plated retirement funds accounts. So who cares. They cannot print that kind of money, at least not in $100 bills. I plan on my greenbacks out pacing gold. And you can bank on it!!! ;)
once s significant portion of spending ceases, the economy takes a little while to reorient itself to real demand, mostly because people are not perfect, rational actors. As such, sudden decreases in spending, in whatever capacity, generally lead to a reorientation of production.
I don't disagree with this.
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