Category: Debt Levels

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Druckenmiller Sees Storm Worse Than ’08 | Bloomberg

Stan Druckenmiller, George Soros’ former partner and one of the best-performing hedge fund managers of the past three decades, warns of the real long-term threat to the US economy:

Druckenmiller, 59, said the mushrooming costs of Social Security, Medicare and Medicaid, with unfunded liabilities as high as $211 trillion, will bankrupt the nation’s youth and pose a much greater danger than the country’s $16 trillion of debt currently being debated in Congress…… unsustainable spending will eventually result in a crisis worse than the financial meltdown of 2008…

Read more at Druckenmiller Sees Storm Worse Than ’08 as Seniors Steal – Bloomberg.

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How urban Chinese workers helped cause the great recession | Quartz

Hillary Rosner describes how the inflow of savings from China contributed to the US sub-prime crisis:

“The foreign reserve holdings of U.S. Dollars,” the researchers write, “which had been at less than 11% of U.S. GDP prior to 2000, grew rapidly after 2002; in fact they almost doubled over the 5-year period from 2002 to 2007.”

Read more at How urban Chinese workers helped cause the great recession – Quartz.

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EconoMonitor » Beijing’s New Leaders Are Right to Hold Back

Michael Pettis argues that China cannot stimulate its economy out of trouble:

There are still bulls out there who insist that China is out of the woods and making a strong recovery, for example former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, who argues in his article strangely titled China doomsayers run out of arguments:

“The missing element from the low growth narrative is that unemployment would rise, provoking a stimulatory policy response. China would extend the transition and put up with low-return investment recall that when unemployment was the issue, Keynes was prepared to put people to work digging holes and filling them in rather than have unemployment rise sharply. To be convincing, the low-growth scenario needs to explain why this policy response will not be effective.”

It seems to me that the reason why simply “provoking a stimulatory policy response” won’t help China has been explained many times, even recently by former China bulls. Of course more stimulus will indeed cause GDP growth to pick up, as Grenville notes, but it will do so by exacerbating the gap between the growth in debt and the growth in debt-servicing capacity. Because too much debt and a huge amount of overvalued assets is precisely the problem facing China, it is hard to believe that spending more borrowed money on increasing already excessive capacity can possibly be a useful resolution of slower Chinese growth.

Read more at EconoMonitor : EconoMonitor » Beijing’s New Leaders Are Right to Hold Back.

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Joseph Stiglitz: We have to shift our focus from money to credit | The IMF Blog

Joseph Stiglitz writes:

This might seem obvious. But a focus on the provision of credit has neither been at the center of policy discourse nor of the standard macro-models. We have to shift our focus from money to credit. In any balance sheet, the two sides are usually going to be very highly correlated. But that is not always the case, particularly in the context of large economic perturbations. In these, we ought to be focusing on credit.

This approach should be obvious to bankers who stand astride the two sides of their balance sheet: loan assets (credit) and deposit liabilities (money). Deposit liabilities may at times grow faster than loan assets but not vice versa.

Read more at The Lessons of the North Atlantic Crisis for Economic Theory and Policy | iMFdirect – The IMF Blog.

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Debunking austerity claims makes no difference to Europe’s monks and zealots | Telegraph Blogs

Ambrose Evans-Pritchard attacks euro-zone austerity:

Britain’s public debt was 260pc of GDP in 1816 at the end of near perma-wars: Seven Years War, American War of Independence, and the Napoleonic Wars. This was whittled down to 24pc over the next century by the magical compound effects of economic growth. The debt reached 220pc in 1945, the price for defeating fascism. This was certainly a drag on the post-War recovery, but it did not stop debt falling to 36pc by the mid-1990s.

Britain twice recovered from massive debt through a combination of growth and inflation — not necessarily in that order — but they had control of their own currency. The states of Europe are strait-jacketed by a currency dominated by the austerity-minded Bundesbank.

Read more at Debunking austerity claims makes no difference to Europe's monks and zealots – Telegraph Blogs.

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PIMCO’s Gross: Investing may be more difficult in years ahead

Charles Stein and Alexis Leondis at Bloomberg quote Bill Gross, co-chief investment officer at PIMCO (Pacific Investment Management Co) about the outlook for the next decade:

Recently, Gross has become more reflective in his monthly online commentaries. In the April outlook, called “A Man in the Mirror,” he suggested that the careers of the great investors of the past three or four decades were fueled by an expansion of credit that may be coming to an end, and that investing may become more difficult in years ahead.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah — me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” he wrote. “Perhaps it was the epoch that made the man.”

Central banks have at last awoken to the dangers of rapid credit expansion and are unlikely to allow a repeat of the credit-fueled growth of the last thirty years. Bull markets of the future are therefore likely to be a lot more sedate.
Read more at Pimco’s Rising Stars Pull in Money for Future After Gross – Bloomberg.

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Expanding debt: Dousing the flames with gasoline

We are now in the fifth year of recovery from the worst financial crisis in 50 years — fueled by expanding household debt, rising from 50% of GDP in the 1980s to close to 100% in 2008. Contraction since the GFC has brought US household debt back to 80% of GDP…

Household Debt as % of GDP

But a worrying sign is that consumer debt has started to rise
Consumer Debt as a % of Disposable Income

And Steve Keen points out that margin debt is also rising, fueling the latest stock market rally.

Yahoo: Steve Keen Interview
[click on the image to view the video in a separate window]

Holding interest rates at artificially low levels for an extended period risks fueling another credit bubble. The Fed/central bank needs to react quickly to expanding credit in any area of the economy. We all hope for a recovery, but it must be sustainable — with consumption fueled by rising employment rather than rising debt — and not another debt-fueled boom-then-bust.

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Australia: Housing affordability still poor

Interesting article by Leith van Onselen on Australian housing affordability.

Today it takes “380 weeks on the average wage (just over seven year’s income) to buy a typical house. This is down from around 430 weeks average wages (just over eight year’s income) required to buy a home in 2008 and 2010.”

Good news. But compare that to less than 250 weeks in 1995 — and less than 200 weeks in 1987.

In 1960, it took homebuyers just 7500 hours [188 weeks on the average wage] to pay off the average mortgage.

via Housing affordability improves but still poor | | MacroBusiness.

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