Thursday, August 23, 2007

70 year debt cycle near peak

Liquidity Can't Solve Insolvency

"In the 1950's, every dollar of new debt produced over $4.00 of economic activity. But by Year 2000 it had dropped to 20 cents of GDP growth and only 10 cents by 2005. Last month fell to only a nickel of economic growth for every dollar of debt growth"

Posted by sold 2 rent 1 @ 11:41 AM (1572 views)
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19 thoughts on “70 year debt cycle near peak

  • planning4acrash says:

    I disagree. I wouldn’t buy gold, silver or oil until highly leveraged bets on these have unwound and the credit crisis has run its course. Bubbles, right now, are everywhere, but I would buy these once they have bottomed out. In the meantime, I’d only trust my money with a high interest account in a big name bank. A big truth right now, is that our low savings ratio is something that must unwind. People will need more of an instant access savings account when they find that credit is harder to come by. So, the effect of paying off debt on consumers and home buyers will be multiplied by a need to build up savings.

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  • Maybe I’m wrong in making this assumption but if the banks reserves are looking shakey will they not want to build them back up by offering higher interest rates on their savings accounts.

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  • sold 2 rent 1 says:

    P4C – Agree on gold issue.

    Back to debt
    In the 1950s it was companies who borrowed to invest in factories and manufacturing. The benefits to the economy of this debt-investment were felt for decades.

    Today it is consumers and private equity that are the big borrowers.

    Consumers borrow to finance consumption and buy houses. This economic growth is short lived and is shown in higher company profits and job creation in construction/property/finance sector.

    Private equity groups buy companies to cut waste and the laden victim company with debt. There is no long term investment in capacity here.

    We are seeing diminishing returns on debt taken on with the economic growth gained.

    With 5 cents of economic growth gained from $1 of debt taken on, the limit to this madness is close to the end.

    There is no easy way back to the 1950s mentality. Unfortunately it will take a depression to change attitudes to debt-consumption. A recession is “not enough”, as numerous ones since the 1970s have proved..

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  • planning4acrash says:

    Maybe a recession would have been enough, had governments let one happen at the time of the .com? I wonder if they have any further tricks up their sleeves to give us another bull market and make a full blown depression even more unlikely?

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  • I think the only way to keep things going a bit longer is to try to inflate, if you consider that Sterling is now only worth a tiny fraction of what it was 100 years ago there is not that much left for them to inflate away. Therefore the end must be near as pretty soon there will be nothing left to inflate.

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  • sold 2 rent 1 says:

    Total debt as a percentage of GDP has refused to go down in every recession since 1950.
    The only way out of a recession is to take on more debt.
    Recessions do not cause changes in people’s attitudes.
    Depressions do.

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  • sold 2 rent 1 says:

    mrmickey,

    Even the inflation of the 1970s couldn’t erode the debt.

    Looking further back into history (see graph)
    http://www.thelongwaveanalyst.ca/downloads/NonPublicDeptPerGDP_multi.doc

    The inflation of WWI managed to erode some of the debt but not enough to change attitudes and after the war we saw debt taken on like never before and rocket to a peak 1933.

    The problem is that inflation rewards consumer-borrowers and in order to get back to an investment-based economy (as oppposed to a consumer-based) we need borrowers to be punished.

    IMHO only a depression can alter attitudes for this change to take place – sad as it all seems.
    Think of it as life only exists because of death.
    The death of an economy will bring new life.
    Nature and economics are closer than you think.

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  • planning4acrash says:

    So, how do you prosper during a depression?! Assuming that you, like me, are debt free?

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  • S2R – would you call Japans ‘lost years’ a recession, a depression, or something else, something new?

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  • sold 2 rent 1 says:

    Buy gold/gold stocks (after the credit crunch) and move to a part of the globe that is self sufficient and far from the wars that will follow.

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  • sold 2 rent 1 says:

    Here is the long term US TOTAL debt graph

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  • stillthinking says:

    Hmm. The amount of times I have read a buy gold statement is startling. If I, personally, thought that gold was unavoidably going up, I wouldn’t mention it at all in order to give myself extra time to buy at the existing low price.
    So if I follow what planning4acrash says, and he does sound knowledgeable on this stuff, the gold now is being treated as a speculative asset, and after the credit crunch causes all asset classes to fall (including gold), then gold will be worth buying because the only way to safely avoid any high-jinkery with money.
    There are billions of people out there though, so as soon as gold mania becomes common knowledge the prices will be meteoric, but by then nobody will be able to buy any apart from no-debt people. Surely a good move for China would be to try and secretly continuously buy gold to get out of dollars? Also, the spanish bank had to sell a load, and so did the UK, but the price didn’t depress. These weren’t small sales as well. Presumably all the people holding gold at the moment are thinking that the price will go up otherwise they would sell, and their job is thinking about gold. So why would it necessarily fall with the credit crunch? Particularly when if it becomes a global currency the price will sky-rocket. I don’t get the impression that the bust hedge funds or the mortgage providers are holding gold. So holding onto cash to buy gold later is surely just the advice hold on to cash because increasing in demand, in which case the timing of a gold purchase is speculative and not really a guaranteed winner.
    ?????

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  • stillthinking says:

    Also, the stock market problems are not in the general media yet. They are not observed as significant by the population. They are just another meaningless up-down stock market panic and thereby irrelevant. So sentiment hasn’t changed, and people are, in fact, still buying houses on high mortgages.

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  • The death of an economy will bring new life.
    Nature and economics are closer than you think.

    The death of an economy on a global scale also brings war & famine which, forgive me for saying so, is a very high human sacrifice to be laid upon the mantle of ‘pure economic’ rationality.
    Nature and economics have very little in common beyond the fact that human beings created the system, and that ‘capitalist theology’ requires that the system be viewed as ‘natural’ in some way.
    I actually agree with you about long debt cycles, but the conclusion that a good dose of depression is required in order to re-educate consumers in the way of economic ‘law’ perhaps forms the best defence possible for the Central Bank’s ongoing manipulation of the system to prevent this from happening.
    The concequence of ‘pure economics’ is, after all, often ‘total war’.

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  • captain sensible says:

    Getting back to the main purpose of this website, fine with me if investors bail out of other asset classes (notably property) and into gold as at the moment my focus is finding somewhere decent to live at an affordable price. If others want to hoard gold and make a future killing I can live with that. What I can’t live with is the hoarding of houses, which deprives others of an immediate and necessary utility.

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  • planning4acrash says:

    Thanks stillthinking, tho I don’t know much really about gold! What I’m saying is, that if you have debt obligations and hold gold, there is a market for gold still (and oil) but money markets are dried up, and you need liquidity, what do you sell to keep yourself afload and pay your here and now obligations? You sell Gold and Oil, because it is all that you can sell, and it seems that some of these assets may well be inflated above their natural level by speculation, so they could have some way to fall, but I’m no expert on these, so please don’t make investment choices based on me!

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  • sold 2 rent 1 says:

    Tickock,

    I may have got carried away with the nature sh*t.
    I am not saying a depression will be easy or pleasant as it clearly will not.

    Just as forest fires destroy everything in their path, after the event new life (and perhaps different plant/animal species) will inhabit the destroyed area.
    It is looking likely that the emerging economies will prosper after the depression – and why shouldn’t they – they are the ones who are saving now.

    On Japan, I would describe their “lost decade” as a severe recession – not a depression – not yet anyway.

    Firstly, not enough debt has been destroyed yet.
    Secondly, property prices, although they have fallen by a huge amount, Tokyo is still one of the most expensive cities in the world.

    The world’s consumers have kept Japan in business for the last decade.
    Once these consumers stop spending Japan will enter its final cleansing stage – more debt destruction, more deflation, and eventually rampant inflation.

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  • Gold is not overpriced by historical standards at the moment. However, it’s certainly possible that there may be a period coming shortly in which it may be available briefly at bargain prices. Me? I have a few grands’ worth and I’ll just hold onto it, and may buy some more (and gold stocks) if the price dips significantly in the future due to others being forced to sell.

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  • Amen, @Sold2Rent1

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