Current Economic Course

[AFineMess]

Nah, because then all the bulls would say rates are going down.

This encorporates a rate drop, like I say my assumptions err on the bullish side.

This makes the graphs and results a little more bullish.

I thought this approach was clear from the tone at the begining of my original post?

Didn't I paint an "all is well" picture? Maybe my hints weren't clear enough?

This was to prevent bulls shouting "perma bear!"

Instead I have a Bear shouting "Bah",

I'm guessing because you feel it's not soon enough?

5% is fine for this analysis.

.

It is strange. The argument seemed very credible and clear to me.

The whole point of choosing low, bullish figures is to show that even if you use the bull's figures, we get an economic crisis in about 20 years, just on current, published trends. So even if you are the most optimistic person in the world, we need to do something about it no later than 5 years or so.

It's using the bulls figures to demonstrate a bearish outcome - so if the figures really are more bearish than reported - the the outcome will be even worse.

[ParticleMan]

Ok, first post and all.

First - price elasticity? What's the effect as we approach crossover on demand, and how does that interact with asking prices in general (hence feed through to credit demand hence lending volumes).

Second - forex feedback effects? Debt is underwritten in GBP/FOO crosses and traded on market just like any other commodity; as crosses between net lender and net borrower nations tip in favour of net lender nations (which happens as a natural function of more of UKPLC's asset base being owned overseas hence more of UKPLC's GDP leaking as yield increase in favour of said lender nations), Sterling-denominated input prices increase dampening demand (this is the path the US seems to be on at present).

Discuss.

[1] you're trusting published GDP data when it's reasonably well established that published RPI data has been... tinkered with... putting it mildly.

[2] market participants are at least partly rational actors; the next two decades will offer opportunities for individual surplusses (the contents of each passenger's wallet on the SS Britannia) to be swapped on a scale you've not yet modelled; globalisation of labour pools is this on a national level, the (re)-emerging overseas property market is this on an individual scale but both with relatively high barriers and bewildering transactional latency; both are being addressed through normal market behaviour (which tends to lower friction and increase transactional throughput over time); realtime forex swaps for dummies is just around the corner, and that's just the beginning.

[3] the upright ape has survived an ice age or two if memory serves; have some faith in the little guy - if he loses faith in you it's all over.

[JustYield]

Ok, first post and all.

Lots of nice words in the post and all. Now try and explain what you mean so that an intelligent 11 year old could follow. If you can't, then I'll assume you don't really understand what you're on about either.

Comment on the original post:

I like your approach to show how ludicrous the recent rates of debt growth are. But no-one expects these rates of growth to continue, do they? Obviously there are feedback loops in the economy e.g. people refuse to or can't afford to take on ridiculous debt (especially when they don't need to - because there are cheaper alternatives, such as renting).

An interesting question would be to estimate what price houses in the UK need to fall to in order for the rate of debt growth to be within your 'GDP affordability' range. Only a small proportion of the total UK housing stock has changed hands at these recent high prices. Even with a 30% drop in house prices I think the debt service:GDP calculation will still look somewhat stretched.

Unless of course the music stops and everyone settles in the property they're currently living in for the rest of their lives.

JY

Edited June 4, 2006 by JustYield

[ParticleMan]

If you can't, then I'll assume you don't really understand what you're on about either.

We're all here to share and learn a little, and best way to learn I've found is to refine a question, so here goes.

Part I - Price Elasticity

Starting with the assumption that the curves are just as shown at thread top, and that the market isn't fundamentally "different this time" ie behaves just like every other market does day in day out; the question is - what is driving the demand for debt? Ultimately - it's the maximal price a buyer is willing to make a contract at, and conversely the minimal price at which a seller will make a contract - both including all other factors, including risk, and the cost of capital itself (borrowing costs); it seems reasonable that as debt servicing costs as a function of total production (ie, GDP) peak that these individual contract bid/ask spreads will widen, settlement/ exchange prices will trend down in value, and also that the number of contracts agreed contracts will reduce; the cumlative effect - is a (historically) brief pieriod of high volatility, until the downtrend becomes esablished.

For the eleven-year-old in your example; lets suppose that the bank of mother and father can at most pay you a fiver a week in pocket money (you the child labourer), and best-case, lend you a further week's pocket money in advance (for them - the total part of their household level GDP not yet committed to debt servicing constrains this); this allows you to buy, on market, at most ten quid worth of your favourite sweets, half borrowed, half earnt; now - because this is a bank, if you excercise this option (borrow next week's money too, so that you can spend that tenner), you will forfeit on some sort of future-looking schedule the moneys borrowed; the bank of mother and father is fiscally responsible, and demands all moneys borrowed be repaid in the next interval for simplicity's sake (the example holds without this too, more on this later).

Now; this is the child's perspective; it has income at five quid a week and an overdraft of exactly five quid; this represents the bidding/ buying side of the equation.

The store keeper, being an astute business person, owns all of the sweets stores within your (the child's) radius; this represents the asking/ selling side of the equation.

Once all buying capacity is exhausted, and all children are indebted to the point where all pocket money is now fully committed to servicing existing debt (we've been kind in this example and chosen a Sharia-law household, and not worried about interest servicing costs) - what must the store keeper do to stimulate demand?

What must the store keeper have already done before this limit is approached? What has happened to their sales volumes? What has happened to the agreed prices week on week, of the total sale at the register? What has happened to the agreed prices, sale on sale? Does this last fluctuate more than normal as we approach the total debt servicing limit of the (micro) economy surrounding the shop?

Finally - and this is the point here - is what happens to the draw down on the bank of mother and father, when seen as a time series? What happens to the total incomes of less kind households, who expect interest repayments in addition to capital repayment, in order to offer a facility for extended repayment schedules, as we hit this point of equilibrium? Are they able to find as many children as willing to borrow? Or do their returns/yields plunge? Do the risks of non- or part-payment increase?

Now how does all this feed back into the original graph series? If prices are elastic and reflect demands of both buyer and seller, and if debt servicing load verses productive capacity is a factor in buyer demand (clearly - it is - witness vendor zero-down offers and "no payment until" marketing) - what happens to agreed price as this ratio approaches 1:1 from the left?

Part II - Forex Feedback

Back to our bank of mother and father; these goodly folk, and in fact their entire community earn Swiss Francs, but the store keeper is demands settlement in Euro (it's not so far between the Swiss and the French border); what will happen to the perception of Euro, and the rates at which it is willing to be exchanged for goods, or indeed their (equally colourful) Francs directly, when the sweet store micro economy is exhausted? Rember, there is no more demand for Euro, the consumers of it have exhausted their ability to borrow, and have forward committed the entirety of their output toward repayment.

If prices are elastic, and reflect demands of both buyer and seller, and if input prices (this time - it's of course chocolate - and the best kind is Swiss - yum!) are in Francs, but buy-side demand is trending down - where does this leave the store keeper?

What happens as we approach this limit from the left? What is the impact on prices? What is the impact on demand for debt as this takes hold? What is the impact on the willingness of the sell-side (net issuers) of debt, and the prices at which they will agree contracts in Euro? How does this feed into the graph series shown?

...

[JustYield]

JY

[CrashIsUnderWay]

You're reasoning is just cr@p.

Sounds like your boyfrined has been making you swallow it recently.

Personaly, I LOVE this analysis, and I take my hat off to you. Fantastic stuff.

The only fly in the ointment is the 5% assumption, which just crumbled due to the Japs ending deflationary times.

The easy credit is over, back we go to 6%...7%.... or even >gasp< the long term average nearer 8%.

[BufferBear Bitcoin Bull]

I am really stunned by some of the attitude displayed on this thread. This guy has gone to some trouble to put together a rather elegant argument, logical, well reasoned. This is a rare event on HPC - mostly we only get uber-bear statements backed up by sweet FA.

Hear hear.

[boom_and_bust]

Then I don't know why you are arguing, I said we can continue "as is" for another 5 or 6 years on the current trends.

Good luck with it, it sounds ambitious.

Hi,

In your model, can you account for increasing oil and commodities prices? I only say this as I myself have been digesting the recent OECD economic reports in the past week and in particular, on the UK, they do make quite a fair point that within the next 3-5 years, continuing high oil and commodities prices will retard growth within highly indebted countries with high house prices such as the UK. Yes, the UK specifically targeted in the analysis.

The conclcusion drawn within the body report that high oil and commodities are a permanent, increasing aspect of the future as third world nations continue to develop and industrialise. At the same time, the benign, deflactionay aspects of those nations industrial output is likey to have peaked and will be upwards from now on. Combined with higher energy costs, the long term outlook for inflation and interest rates is up. They have stressed several times throughout the report that the US and UK are about the most vulnerable nations to these new directions due to the unprecendeted levels of debt. Again, while they see an overall, benign world economic path, the UK is likely to see a rough time ahead, particularly if a shock is encountered. It also went onto chart how the UK tax burden is the highest in history (42.4 per cent of GDP) and is likely to increase due to poor government fiscal positions (they have a different conclusion to you there, on your charts!). Fears over the dollar and US trade defecit, it's impact on currency and stock markets and the UK's historical links to the US economic path are also explored. Remember, it's little over a week ago that a wobble in the US markets caused a wobble in the pound and the FTSE share indices here.

I would suggest you digest it as well, the world is too turbulent a place not to consider a wider picture. Aslo have a look at recent government cutbacks in spending, even little items like the repeal of the pensioners winter heating allowances, the recent cutbacks in police expenditure and the little matter of £3bn that was transferred out of public accounts from road and rail funding provision to offsetting the fiscal defecit. There are a lot of stealth cuts cropping into the public accounts to try and plug the reckless spending and waste in the fiscal positions of UK plc - you do not even explore this in your analysis. My feeling is that reality is catching up with the 'miracle' economy. If you are basing any kind of financial decision making on your above analysis, I would suggest you dig a little deeper into the fiscal position of the current administration. The full extent of the accounts is never really revealed until after a government has left office.

http://www.oecd.org/document/18/0,2340,en_...0.html#contents

Edited June 4, 2006 by boom_and_bust

[lewissheridan]

If every post was as clear, and well presented as this, I think we'll have a lot less bickering on opinion and more constructive analysis based on facts.

lewis (aka armchair economist wannabe)

[Pooh Bear]

I think the encroachment of debt on GDP looks about five years away. The only way to avert this is to reign in personal debt growth, the most efficient way to do that is to slowly ease rates upwards.

Thanks for this excellent thread, ?...!

From Jim Sinclair today, the US appears at an encroachment point already:

The Official Treasury “audited” statement of the financial condition of the USA presents the real financial position.

The present Administration claims a $296 Billion dollar Federal Budget Deficit predicted for 2005. The audited statement reveals a Federal Budget deficit of 720 Billions for 2005.

This audited document from the US Treasury is reported to say that US Government debt is $49 trillion. Assuming this then it is very close to a time when interest on US debt will exceed domestic spending.

Is this a similar situation to your explanation at the start of this thread? Does the same argument you use re: personal debt apply to Government debt?

Will the adding of the Private Finance Initiative debts to the public accounts in the UK mean that the UK government is also nearer their own encroachment point? What effect will this have on the economy? Does the Government have any choice but to reduce spending, or increase taxation?

[Pooh Bear]

Bump. Sorry, saw ?...! is logged in.

[?...!]

I forgot about this thread I made.

To explain further. Yes the US is approaching a point where debt expansion is accelerating faster than GDP expansion as is the UK.

This graph (a little old but still relevant)...

basically shows the US current account vs GDP as a percentile, now thats sounds a little over complicated.

But it gives a good example of how expansion of US debt can out pace expansion of US GDP. (p.s. for those of you that haven't noticed please appreciate the importance of how this graph correlates inversely with the one on HPC home page).

A clear example of how the UK housing market and in turn UK monetary policy is a near perfect mirror of our cousins across the Atlantic. Yes there are regional differences but we share trends and cycles.

[Blue Peter]

Why are the values negative?

Peter.

[?...!]

Why are the values negative?

Peter.

The US current account is negative.

According to the CIA it's $-829,100,000,000

see here

https://www.cia.gov/cia/publications/factbo...r/2187rank.html

Edited August 15, 2006 by ?...!

[Blue Peter]

Cheers, stupid me,

Peter.

P.S. ARe you going to continue our economic education? What would your graphs look like with slightly higher interest rates?

[Jason]

This is very interesting work. I know you based your workings on 5%, but credit action actually produce an APR figure for all the debt which is higher than 5%...

[Marina]

The original poster said:

"That £6billion additional cost is much less than the £30billion GDP growth over the same period, we CAN afford the additional costs of the debt."

So it costs consumers £6 billion extra to service debt and the Gross Domestic Product of the economy grows by £30 billion.

In what way are these two things related?

[?...!]

The original poster said:

"That £6billion additional cost is much less than the £30billion GDP growth over the same period, we CAN afford the additional costs of the debt."

So it costs consumers £6 billion extra to service debt and the Gross Domestic Product of the economy grows by £30 billion.

In what way are these two things related?

As a rough guide, wages are paid from GDP. Consumer debt is serviced, and repaid from wages.

Of course there are other income streams and overseas investment opportunities but most people fall into that generalisation.

[Blue Peter]

There is a point in the not to distant future where GDP growth and the cost of servicing personal debt (see graph) become parallel, which if you understand what that actually means is a very worrying point.

That is the point beyond which the lenders are encroaching on GDP.

In laymans terms their share of GDP growth grows faster than GDP growth.

Sorry for returning to this thread again, but I realize that I don't quite (or at all) understand this encroachment phenomenon.

Having worked through the figures, I can see that your comparing the annual growth of GDP growth with the growth of servicing the debt (oh and if you use an interest rate of 6.91% as Jason suggests, we're already doing it). Unfortunately, I can't understand what the growth of GDP growth is. Effectively, it's the 2nd derivative of our GDP, so is it something like the acceleration of our economy? Then what is the growth of debt servicing (the velocity of our debt servicing?). I'm not sure why it's these two figures being compared, against, say, using the 1st derivatives of both.

Peter.

[eric pebble]

I am really stunned by some of the attitude displayed on this thread. This guy has gone to some trouble to put together a rather elegant argument, logical, well reasoned. This is a rare event on HPC - mostly we only get uber-bear statements backed up by sweet FA.

Some people have really missed the point on this - the forecast is bullish to avoid charges of being unrealistic from bull posters. The model shows that the status quo is unsustainable beyond a 5-10 year period - AT AN ABSOLUTE MAXIMUM! More likely, it will pop before then as investors/lenders see what is coming.

If you all just want to be told that it will crash at 3pm tomorrow, fair enough. There are plenty of posters who will tell you that. But it isn't going to happen that quickly.

The beauty of this model is that demonstrates that it WILL happen, for sure. Has anyone else provided a genuine argument of that strength?

Yes -- I agree. AND - surely anyone out there who works and leads an ordinary life can just think how this confirms their man-on-the-street common sense: Things just CANNOT go on as they are without some sort of huge fallout. The fact that the ordinary punter earning under £20k simply cannot afford even a basic property in 95% of the UK says that, without doubt, there is something very very weird going on. There must be countless MILLIONS of people out there who are just finding it SO hard to survive financially at the moment - with all the massively increased bills - utilities, council tax [a scandal of mammoth proportions], petrol, as well of course as rents and mortgages. How many of you out there DON'T know of people who are only JUST surviving, getting by on pittance, borrowing & juggling small amounts of money all over the place just to get by...... IS this my imagination? The majority of people out there are really struggling!? NO??

Edited January 10, 2007 by eric pebble

[othello]

Good post. Just one point, if I understand things correctly. I accept that you want to take a bullish stance in your figures but you are assuming that the growth in GDP is availabe to cvover the increase in debt costs. However surely this is flawed as not all GDP growth is available to service debt - if reports are to be believed much recent growth is derived from the immigrant worker population who are taking their a significant proportion of their earnings outside the UK.

[Arsene Wenger]

If the economy is measured by the performance of the FTSE and DOW JONES index then heaven help us.

This week has already seen a steady drop in both indices and my view is that it will get worse.

Does anyone know of any good economic data anywhere in the world??

[whistleblower]

Is this a surprise ?

UK deficit widens as imports rise

Exporters may face a tough 2007

The UK's trade deficit rose in November to £4.7bn from £4.1bn as imports rose, official figures have shown

What now Gordon?

[Nonnamouse]

I haven't been able to download your graphs for some reason but with all due respect I think you are overcomplicating something which is completely obvious and doesn't need an economics course by way of explanation.

The fact is you can't grow a debt at a greater rate than the growth in your earnings ability to repay it, no more than you can grow a runner bean higher than the stick which you are using to hold it up.

[Blue Peter]

Having worked through the figures, I can see that your comparing the annual growth of GDP growth with the growth of servicing the debt

Or have I(looking at the figures again) got that wrong and it's the growth of the growth of servicing the debt?

Peter.