Sunday, 01 March 2009 04:00

Debt - Thoughts On A Global Problem

These are thoughts from a few of the BoomBustBlog readers who felt compelled to share their viewpoints:

The Bottom Line

Our world is suffering from a crisis. Our crisis is too much debt. Debt acts like a stimulating drug when times are good. Reasonable amounts of debt are not just good, they are great. Globally though, we have taken too much of this drug. This drug was dispensed at a low cost by banks all over the world. People used this debt to buy things, and to make levered bets on home prices - in record amounts. When the illusion of eternal home price increases dissipated, we were left with a hangover and a financial crisis. However this crisis had at its root one thing - too much debt.

Our politicians are not trying to cure our disease. They are trying to cure our symptoms. They are not dealing with the fundamental issue of too much debt, globally. They are NOT trying to lower debt, allow debt to leave the system, and encourage people to save. Instead, they are trying to keep the debt there, lower the interest payment on the debt temporarily, encourage us to borrow *more* not less, and spend vast amounts of money keeping dead (insolvent) companies on life support. They are encouraging the disease to curb the symptoms short term, and then wondering in amazement why the disease is not going away. If we paper this over and keep this up, we will end up with over $350T in debt by 2027. We will be leaving our kids with so much debt, they cannot possibly do anything but buckle.

I would highly encourage you to give this a read. I believe we are moving in the wrong direction, and think we need to get back to our roots of working hard, being entrepreneurial and innovative, living within our means, with a great system of law and business as our backbone. That is what made us strong - not financial engineering, flipping homes with borrowed money, and speculating. Please do send this around if you are so inclined. I hope to shine some light on the disease that is being hidden from our view by our politicians, and encourage people to move in a direction that will bring our country back to prosperity again.

Below I present a quote, some key points, and a bunch of charts containing data which I believe make a compelling case in support of my view. Please do let me know what you think.

The Key Points

This quote rings true:

"Financial deregulation was based on a misguided belief that the financial system operated like an ordinary market for goods, where the market itself would work out a sensible volume of and price for credit. A proper analysis of how money is created shows instead that a deregulated financial system will pump out as much credit as borrowers can be enticed to take on. In a world in which leveraged speculation on asset prices is possible, that will lead to the economy taking on so much debt that it will ultimately fall into a debt-induced crisis–which is where we are now. Once in this situation, deregulated finance then amplifies the problem by going from supplying too much credit to cutting off the credit tap in a manner that reduces overall economic activity." (source)

These are what I believe to be the key points regarding global debt, which stem from the graphs below:

  • Out of control growth. Private debt growth in the US and Australia perfectly fits an exponential trend - it is growing exponentially, which is out of control.
  • Banks create as much debt as possible. A deregulated financial system like ours will pump as much credit as borrowers are willing to take on, and that amount can be (and is now) unsustainable both for banks and for us.
  • Too much debt creates crises. Too much debt, especially when directed towards leveraged speculation on asset prices, inevitably leads to a debt-induced crisis.
  • US debt is unsupportable. We have an unsupportable amount of debt. We have $52 TRILLION of debt - $455k of debt for every household in this country.
  • We had a *global* debt bubble. Australia, Ireland, UK, Switzerland, Netherlands, Belgium, Portugal, Austria, Denmark, Japan, Luxembourg, Italy, Spain, and Switzerland *ALL* have debt bubbles as well.
  • *Globally*, almost all of us engaged in leveraged betting on home speculation - US, Spain, Canada, Sweden, Ireland, UK, France, Denmark, Italy, Norway, Finland, China, Vietnam, and more.
  • No savings. The US, Japan and Canada also have virtually negligible savings rates.
  • This debt has artificially goosed our GDP - spending borrowed money registers in GDP - and in 2007 Private Debt growth accounted for 20%+ of GDP (spending) in both the US and Australia.
  • Borrowers around the world are now buckling under the enormous debt load piled onto their respective backs, betting on home price increases that never came.
  • Our politician's solutions #1. Our politicians are trying to paper over the problem by borrowing enormous amounts of money themselves, to prevent the companies and people burdened by debt from relieving themselves of that unsustainable burden.
  • Our politician's solutions #2. Our politicians are not trying to cure the underlying problem of too much debt, or else they would give money to the people to pay down their debt. They are not paying down or even addressing our over-leveraged state.
  • Our politician's solutions #3. Our politicians are instead trying to lower the interest rate on everyone's debt while leaving the debt basically the same, which (1) does not cure the underlying disease ; (2) inevitably will lead to problems down the road when interest rates naturally pick up again while the debt is still there ; (3) provides huge amounts of indirect bail out money to Wall Street, who owns a lot of the securities our politicians are buying to bring rates down in the 1st place.
  • Our politician's solutions #4. Our politicians are encouraging us to borrow more, with proposals like interest deductability on auto and motorcycle loans.
  • Need exponential debt growth just to maintain GDP, b/c flat debt removes 20% of spending. The only way we can paper this over is to keep growing the debt at its exponential pace. If we simply hold debt constant, 20% of our spending goes away, which will cause the debt default cascade anyways. There is no middle ground here.
  • We will completely destroy our economy within 20 years if we keep this up. If we keep growing debt exponentially, in 20 years we will have so much debt that mathematically, we will be completely unable to service that debt. We will grow our debt from $52T to over $350T, or $2.6M for every household in our country.

The Graphs

Debt bubbles in US and Australia (source)
debt bubble - Debt bubbles in Ireland, UK, Switzerland, Netherlands, Belgium,
Portugal, Austria, Denmark, US, Japan, Luxembourg, Italy, Spain, Switzerland (source)

debt bubbles were built on leveraged betting on global housing bubbles (source, source, source, source, source)

Exponential trend in Australian and US Debt,
respectively (source, source)

Where US debt will go to by 2027 if this continues - $350T+ (source)

Australian debt was leveraged speculation on home prices, but other debt forms
caught on too (source)

Debt is growing ever larger even in Australia as a % of income (same is true in
US) (source)

We borrowed ever larger amounts purely to consume via home equity loans and
credit cards (source, source)

Debt servicing burden for Australians are growing (source)

We in the US, as well as Japan, Australia, and the UK are not saving anything,
and this is unprecedented (source, source, source)

Debt growth's contribution to GDP is now too big to even have a period of no
debt growth (source, source)

Debt is clearly growing faster than anything else (source, source)

Last modified on Sunday, 01 March 2009 04:00