Three charts I want you to look at

[solarbird]

I'm afraid I don't have a lot of time for things, but there are two charts I want you to look at. The first is here, from Deutschebank, but courtesy Global Gorillas:


Keep in mind pretty much all of that refund comes from a combination of bailout and mark-to-myth pricing on securities exchanged to the Fed.

The second is here, at Market Ticker:


Now this isn't entirely up to date, but it gives you the idea; reported GDP is inflated by massive government outflow (see above) and borrowing.

Keyesnians will say, "That's good!" for various reasons long discussed here. And debt is important and borrowing is good - if and only if it is productive to do so, in the aggregate. Most of the boosters are refusing to remember that part.

When is borrowing profitable? When the net economic activity produced as a result pays for 1) the money borrowed and spent (so you can repay the principal), 2) the interest on the money borrowed (so you can repay the interest), and 3) leaves some left over. The third of these is real economic growth in terms of producitivity; if nrs. 1 and 2 are met but not 3, you have no material / production gain, but also no loss, and the financial industry makes a few bucks (see, again, above), and if only nr. 1 is met, well, the economy as a whole has broken even; no blood, no foul.

It's when nr. 1 is not met that you have economic contraction.

After the Great Depression and during World War II and for decades after, additional debt produced substantial additional productive economic output. That number has slowly been declining over time as additional debt has produced less and less productive gains, in a fashion typical of the K-cycle. Where are we right now?


It's not getting better. This is only the M1, and that's a big, big, big problem, but I don't have a good way to generate the broader data. (I have the M2 money multiplier; it's not prettier.) And this chart has been... the closest to following the overall economy of those I can get. If it hasn't picked up - and it hasn't - I have to question whether the larger situation has improved.

Borrowed money counts as economic growth. But it's only actual growth if the debt is repaid, with interest, and profit. We don't have that. Watch out.

Comments

[mikec1157.livejournal.com]

scary.....

"After the Great Depression and during World War II and for decades after, additional debt produced substantial additional productive economic output. That number has slowly been declining over time as additional debt has produced less and less productive gains, ..."

So, what do we do?

[darksumomo.livejournal.com]

That's a graph I almost never see at the economics blogs I visit. I wonder why?

Seriously, I expect only the peak oil doomer blogs (Automatic Earth, for example) would post it.

in a fashion typical of the K-cycle. Where are we right now?

We're in Kondratiev winter, with the trough coming during the next decade, that's where.

BTW, we just finished three Roaring Twenties in a row (80s, 90s, and Oh-Ohs). I just hope we don't have to go through three Great Depressions in a row to make up for it.

[ankh-f-n-khonsu.livejournal.com]

Another excellent post, cheers! I can use these charts directly in lessons, or as ice breakers for social studies lessons. :)

[maellenkleth]

Thanks for the third chart, kerasi. Most enlightening. Now I get to wonder what the equivalent indices for the Zhongwen economy look like. (Yeah, lack of transparency much?)

[solarbird]

The debt overhang simply has to be cleared. It can be done quickly (brief but very, very painful, but leads to quick recovery; see Argentina, eventually, in the 90s) or slowly (extended deflation and economic contraction, which is politically destabilising at the top level). There are too many interests which have too much (illicit, to my mind) power over the US government to allow the former to happen, or, if they can help it, either the latter. So functionally what's happening is that the US is getting a future-paying long-term tax hike (and economic damper) to refund all the losses suffered by private firms at the end of the bubble. (See chart 1, above.)

This is, again, what's known as socialisation of losses, privatisation of profits, or more colloquially, looting.

[solarbird]

The Market Ticker graph? Yeah, the thing that nobody is willing to admit in public is the debt vs. GDP situation. If you don't admit that (if you ignore the implications of things like Chart 3) then you don't care - added (or reflated) debt produces more growth than the cost of the loan and this much new debt is just fine.

And that's true most of the time. But it doesn't appear to be true right now, for various reasons I've often discussed. It's not that "it's different this time;" it's that I think they're comparing the wrong "this time"s.

[solarbird]

Yeah, good luck with that. ^_^

[mojave-wolf.livejournal.com]

Keeping in mind I've had no econ classes since the 90's and even when I read econ stuff I basically try to translate what I read into real English in my head and ditch the jargon, plus I have minimal respect for a lot of the orthodox wisdom (from back when I did study up on this stuff), and keeping in mind even more than we have such a convergence of factors screwing things up that I don't think any one thing can fix the problmes, here is my take on what's wrong w/the current spending --

We have to spend on things that actually add value to the economy. We're not. We're propping up institutions that, while I suppose most of them do add some value (i.e. we're better off with banks than no banks, the stock market and professionals to help people invest in it at least can work to improve things, etc etc; not so sure about some of the other things having *any* net value but that could be ignorance), are basically parasitic in nature -- they exist only to help facilitate transactions and storage of the stuff that really matters.

To illustrate, if you invest 10 billion in a solar plant, you're providing lots of jobs and giving lots of people money to spend that they will almost certainly throw right back into our consumer driven economy, plus you are actually putting money in something that will produce a valuable product in the form of energy (and maybe R&D for some tehncological innovation, etc).

If you invest 10 billion in roads, you're providing jobs/boosting consumer spending, etc, plus keeping a needed part of the economy in good shape.

If you just give poor and lower middle class (or even middle and maybe upper middle class, to a lesser extent), 10 billion, you're not contributing *directly* to production, but you're assuring this will go directly into buying goods and services in a way that will boost the conomy and help people further down the chain as well. (and also has the benefit of helping out people who actually need help, which isn't really economics but is a genuine concern)

If you put 10 billion into bailing out BofA or better yet, VampireSquidsRUs, you are (1) Giving money to people who already have more than they need to spend, thus not stimulating the economy; and (2) saying "we don't really care that you looted the economy, here, stay afloat so you can suck us dry some more", and you are contributing nothing to any kind of meaningful R&D or production, and if anything keeping heads from rolling and maybe just maybe getting some better people in their place, who could maybe manage the services these people provide in a way that actually provides a net benefit again instead of their current self-enrichment programs.

Those first three examples might work to pay down the overall debt. That last sort of bail-out is never gonna help anything.

Yeah, I'm simplifying a lot, but in a hurry. If you have oodles of spare time let me know where you think I have it wrong. =)

Feel free to tell me if you think I'm way off.

Oh, forgot to mention

[mojave-wolf.livejournal.com]

When the current round of deficit spending got started, almost everyone not in full "frah rah go team!" or "boo hiss die other team!" mode, not just me but even people much more sympathetic to the nature of what we're currently doing like, say, Krugman, thought that even to the extent it was being well-spent, it wasn't nearly *enough*.

They're doing the equivalent of putting on little band-aids on a giant gaping wound that needs stitching. Or a humongous poultice if you prefer natural remedies. Which is giving the "Let the wound fix itself" crowd plenty of ammo to say "see? deficit spending doesn't work." When that's crap; even the people who believe in deficit spending and thought the recent was appropriately targeted didn't think this was going to work, or at best had some sort of "Hail Mary" throw the ball up and hope someone catches it 99 yards downfield chance.

Back in the day, this stuff was more down along the lines of "let's think rationally about what is going to work and try to implement it". I dunno what the hell they're doing now; I think it's "let's throw a sop to the spenders and keep the wolves at bay while giving the market a chance to fix itself", but I'm not sure. I'm not sure they know what they're doing. It may be "let's bail out our buddies and throw a sop to the masses so they won't think we're just bailing out our buddies, and in the meantime we're doing fine and if everyone else gets poor that just means we have a more of a leg up on them ha hah we rock!"

That last is more what's actually happening, but I can't quite make myself believe the current team is that cynical, much as I dislike them. (Cheney, yes, I thought that was exactly what his crowd was doing, w/out even bothering w/the sop, but Obama and Geithner and co. at least seem to care what people think of them, even not for other people much beyond that, so I'm assuming they are actually trying to fix things).
"

[darksumomo.livejournal.com]

Yes, I meant Chart 3. While people had noted the declining value of debt over the past 20+ years, no one else has shown that the value of debt fell to zero during mid-2009. Kunstler and other peak oilers have written as much, but they don't show it.

As for the right "this time", that would be the early-mid 1930s, the last time the West was at this stage in the K-cycle. What happened then was that public debt replaced private debt. That's what's happening now. The difference is resource depletion. No one invested in business as usual wants to admit that--yet.

On a less serious note, I love your Ping icon.