Monday, December 18, 2006

The Debt Intensity of Economic Growth or,

The Sardine Can

The previous post (see below) showed the un-sustainability of current trends in new debt creation in the US economy. But how important is debt creation to GDP growth – how much additional debt does it currently take to produce one additional dollar of GDP? Let’s call that ratio “Debt Intensity of GDP Growth”. The chart below shows this ratio since 1965.

It immediately becomes apparent that the US economy has lately become a desperate debt junkie, needing increasingly massive hits of borrowed dollars to create economic growth. As the economy transformed from “production-based” to “asset-based” it had to find additional capital to sustain higher asset prices so as to create consumption through the wealth effect. Unfortunately, it has been “debt” capital instead of “equity”. Indeed, such a massive amount of “money” (total US debt is currently $44 trillion) is simply not available in "equity" form, since it is equivalent to 330% of US GDP or 140% of the world’s combined GDP, ex-the US.

Such capital, therefore, has been created as “money” via the ever expanding synergy between lending and asset appreciation, i.e. a debt bubble. At some point, however, “someone” may want out of the game and wish to liquidate his asset(s). If there is no lender immediately available to provide incremental credit then the seller must find a buyer with “equity” and/or accept a lower price. That is how debt bubbles burst, historically.

There is a story that illustrates this point (NB - thanks to Sandra):

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him too about how great those sardines are. The process gets repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER”. Well, Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick:

“You crook! You liar! I paid you a million bucks for just plain ordinary sardines. They were not the greatest tasting sardines - EVER”, yells Zeb.

Yorick shrugs and replies…

“Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"

Likewise for overinflated assets, if someone decides to "eat them", instead of just "trade" them.

But what consitutes "eating" an asset?

And what does that mean for the economy?

Stay tuned.

7 comments:

SimplyTim said...

You've got my attention and I am staying tuned.

This run-away debt business is like crack cocaine...things are so out of whack, so go into some more debt to feel better.

It is such a crock. We have been "hood winked" into a classic bait and switch swindle of "buy this and it will bring you comfort and happiness." It is society wide.

That path weakens us and certainly doesn't bring happiness. When was the last time you felt good after eating cotton candy?

Guaranteed google rank said...

Shanghai Fashionorganic makes
Bamboo Clothing,Bamboo fabric ,
Hemp clothing,Organic Cotton,
Organic cotton clothing,Hemp Sandal
Soybean clothingVinyl Bag
Vinyl Packaging
laser engraver which is also the perfect choice for stamp making.cnc router
Super file encryption,folder encryption,A powerful and easy-to-use program for encrypting and protecting your data

stairlifts said...

We review the bestonline poker bonus
online poker rooms
online poker guide
poker room reviews
poker sites
and so on.
We offer the highest quality flowers melbourne from around Australia at excellent prices
onlinecasino.com - online casino reviews
with best online casino,
usa online casino, strategy, news!

Hypnotherapy Aberdeen said...

iVANTEE is a professional outsourcing consulting and management company which focuses on outmanaging service
include software outsourcing.website development outsourcing
webサイト 開発ソフトウェア 開発
Laser marker,Laser Marking Machine,Laser Engraver
MCSEflexible coupling

coco said...

nikedao
妮可鞋岛
adidas
nike
运动鞋nikedao
妮可鞋岛
adidas
nike
运动鞋

Anonymous said...

情趣用品,情趣用品,情趣用品,情趣用品,情趣用品,情趣,情趣,情趣,情趣,情人歡愉用品,情趣用品,AIO交友愛情館,情人歡愉用品,美女視訊,情色交友,視訊交友,辣妹視訊,美女交友,嘟嘟成人網,按摩棒,震動按摩棒,微調按摩棒,情趣按摩棒,逼真按摩棒,G點,跳蛋,跳蛋,跳蛋,性感內衣,飛機杯,充氣娃娃,情趣娃娃,角色扮演,性感睡衣,SM,潤滑液,威而柔,香水,精油,芳香精油,自慰,自慰套,性感吊帶襪,情趣用品加盟,情人節禮物,情人節,吊帶襪,成人網站,AIO交友愛情館,情色,情色貼圖,情色文學,情色交友,色情聊天室,色情小說,七夕情人節,色情,A片,A片下載,免費A片,免費A片下載,情色電影,色情網站,辣妹視訊,視訊聊天室,情色視訊,免費視訊聊天,視訊聊天,美女視訊,視訊美女,美女交友,美女,情色交友,成人交友,自拍,本土自拍,情人視訊網,視訊交友90739,生日禮物,情色論壇,正妹牆,正妹,成人網站,A片,免費A片,A片下載,免費A片下載,AV女優,成人影片,色情A片,成人論壇,情趣,免費成人影片,成人電影,成人影城,愛情公寓,色情影片,保險套,舊情人,微風成人,成人,成人遊戲,成人光碟,色情遊戲,跳蛋,按摩棒,一夜情,男同志聊天室,肛交,口交,性交,援交,免費視訊交友,視訊交友,一葉情貼圖片區,性愛,視訊,嘟嘟成人網

愛情公寓,情色,舊情人,情色貼圖,情色文學,情色交友,色情聊天室,色情小說,一葉情貼圖片區,情色小說,色情,色情遊戲,情色視訊,情色電影,aio交友愛情館,色情a片,一夜情,辣妹視訊,視訊聊天室,免費視訊聊天,免費視訊,視訊,視訊美女,美女視訊,視訊交友,視訊聊天,免費視訊聊天室,情人視訊網,影音視訊聊天室,視訊交友90739,成人影片,成人交友,美女交友,微風成人,嘟嘟成人網,成人貼圖,成人電影,A片

said...

runescape money runescape gold runescape money buy runescape gold buy runescape money runescape money runescape gold wow power leveling wow powerleveling Warcraft Power Leveling Warcraft PowerLeveling buy runescape gold buy runescape money runescape itemsrunescape accounts runescape gp dofus kamas buy dofus kamas Guild Wars Gold buy Guild Wars Gold lotro gold buy lotro gold lotro gold buy lotro gold lotro gold buy lotro gold runescape money runescape power leveling runescape money runescape gold dofus kamas cheap runescape money cheap runescape gold Hellgate Palladium Hellgate London Palladium Hellgate money Tabula Rasa gold tabula rasa money Tabula Rasa Credit Tabula Rasa Credits Hellgate gold Hellgate London gold wow power leveling wow powerleveling Warcraft PowerLeveling Warcraft Power Leveling World of Warcraft PowerLeveling World of Warcraft Power Leveling runescape power leveling runescape powerleveling eve isk eve online isk eve isk eve online isk tibia gold Fiesta Silver Fiesta Gold
Age of Conan Gold
buy Age of Conan Gold
aoc gold

呼吸机
无创呼吸机
家用呼吸机
呼吸机
家用呼吸机
美国呼吸机
篮球培训
篮球培训班
篮球夏令营
china tour
beijing tour
beijing travel
china tour
tibet tour
tibet travel
computer monitoring software
employee monitoring