Thursday, May 21, 2009

GDP On Debt Steroids

After bouncing from absurdly-low levels that discounted a new Great Depression, markets have now gone giddy and are blithely discounting a sharp, V-shaped recovery in the economy.

It's not going to happen. The reason can be easily deduced from the chart below (click to enlarge). It shows annual growth rates in nominal GDP and household debt. Notice the tight correlation that existed until 1998, when a substantial and prolonged divergence began and persisted for a whole decade.

GDP Was On Household Debt Steroids During 1998-2008

This was a direct result of the low interest rate policies instituted by the Fed in the aftermath of the dotcom bubble and the 9/11 attacks. The purpose, clearly articulated by then Chairman Greenspan, was to artificially "goose" the domestic real estate sector in the US.

The result, benign at first, was that the economy got hooked on debt steroids. GDP growth bounced back starting in 2002, but it took ever more debt to eke out further modest gains. The ultimate cost was bulging household debt, particularly in lowest-quality mortgages and consumer loans, which could not be supported by workers' earned incomes. Household debt as a percentage of disposable personal income jumped from 90% at the end of 1998 to 132% at the end of 2007 - the fastest rise ever.

Consumption makes up 70% of the US economy. Given that American households are in no great hurry to resume borrowing and that banks are, likewise, in no condition to resume lending to incremental borrowers, growth will be dependent on the other, non-consumption 30%. How fast can government spending and corporate investment grow, to outstrip the weakness of the household sector? Not that fast...

Surely, we can't bet on them growing so fast as to generate a sustainable V-recovery. After a period of inventory-to-sales adjustments that will last a few months (happening already, I believe), we will enter The Great Reset period. And this will go on for years, even decades.

The conclusion is that corporate profits in the financial and consumer sectors are going to be weak for a long time to come. Markets, too, are going to eventually figure this out...


yoyomo said...

If the steady economic decline should lead to too much discontent, TPTB are prepared to preempt any disruption to their priorities:

"It is standard for John Kerry to call the cops whenever a protest materializes at his office – but usually it is some very unenthusiastic Boston cops. This time, however, it was the feds, armed, uniformed cops with cars and badges marked “Homeland Security: Executive Protective Service.” "

Joe said...

I too believe it will be 2018 before any recovery can happen. However, it will be a completely different form of society. At least for those who survive the transition.

Joe M.

marcus said...

Where's Mr. "Bring it On" when we need him"?

The quicker the country realizes what its up against the sooner to start necessary adjustments.

If Chris Dodd's poll ( is any indication there may be a major backlash to the bailouts coming.

Hellasious said...

The Dink Link is up and running... See the Links section on the right... Sudden Debt's Spawn-Off

Cheers and Thanks

Debra said...

Thanks for this very pedagogical resume.
My psych background induces me to suggest that the markets could manage to maintain denial until perhaps even AFTER the dikes break...
Denial has a lot in common with RELIGION and superstition, you know...

Debra said...

Dink, I'm too dumb to post on your blog. I tried, but you don't have Hell's setup with Name/url that I have been using. Suggestions ? How does this work ?
(Sorry about this, Hell, but on top of it all, I lost my comment on dink's thread...)

fajensen said...

Funny, in a way, that debt works a bit like steroids in the body does too: After a while the body's own steroid-system begins to shut down so higher and higher doses is required for the same effect; the high drug levels eventually burn out the steroid receptors and the drug does not work effectively any more.
The patient is left "circling the drain", the medical term for Organ Donor.

Anonymous said...

As a public service:

Thai said...

Thanks Hell

By the way, have hedge funds already been formed on the themes of strategically preparing for any of the following bubbles to pop: health care, education or retirement?

Deb, is your browser Firefox?

Now back on topic: How to reduce this debt??? And make money in the process I guess.

So if people need to pay all this debt back, then they will need to 1. work more and 2. increase productivity.

I suspect 2 will be a lot more popular than 1 and as I know from personal experience, necessity is the mother of all invention.

So let's use the analogy of friction.

People will want to reduce friction in order be productive, and as we all know friction can happen anywhere (think Thai-Marcu-Yo brawls, etc... lots of friction in this world to reduce, lot's of productivity to improve).

So where is most of the friction in society? (clearly health care seems a big one, retirement issues are another, Israel is yet another, etc...).

If you are looking where to invest and how to get rid of this debt, I would suggest finding those companies that can get groups of people (companies/governments/teams/etc...) to cooperate with each other in ways that reduce friction (which is the same as helping coordinate things better).

Anyone interested in a stab at what kind of companies/groups/teams these might be?

I might call them cooperative integrators (you could think of Microsoft Windows as a prototype if you want as an operating system reduces lots of friction).

Hell, how big does a company have to be to be worth an investigation with whatever massive data systems you have?

Obviously most of your readers can make a meaningful return on a much smaller investment than you.

I am distinctly not on the side of the doomers. We will solve this issue.

Debra said...

Thai, I am using Safari, not Firefox. I suppose I could try Firefox, but am not sure that will solve my problem...
I am not sure that the problem is reducing friction Thai.
I see : friction=agressivity, and at this point in time we are moving at light year speed toward collective 0 tolerance of any agressivity whatsoever.
This is a big mistake, in my book. Because we need our agressivity to give us ENERGY to solve our problems, and be able to turn it OUTWARD towards the world for problem solving.
So, ok for cooperation. But no go at cooperation if there is no socially acceptable outlet for agression, or agressivity.
In terms of structures, I'm seeing small ones that pull people from different walks of life together to combine their talents in community efforts. These are working well. They are getting work done, without doing it FOR MONEY necessarily, and without being structured like businesses. They are utopian efforts, I guess you could say. And they are based somewhat on what Cotton has called social networking.
Yoyo, your link got me all tied up in an article about military psychologist Bruce Lefever, who sounded much SANER than his psychoanalyst opponent who, along with others, is trying to throw him to the wolves over the torture question...
I'll shut up now Hell. And pray that I manage to get onto Dink's blog.
Anyone else feel like giving me free advice for being able to post on it ?

Anonymous said...

When will the market figure out that illegal Mexicans are too blame for California's woes.

We won the war against the lazy, greezy, spanish, catholics a long time ago and now imported them as slaves, only to ruin our own state in the process.

We need a "war on illegal scum Mexicans" to get California's house in order.

Thai said...

Safari is the problem, it does not work well with Blogger for reasons that are unclear to me true never the less. Switch to Firefox (at least so far as blogging) and the issues will go away.

Deb, competition will always go on even if not through killing each other. Don't get to narrowly focused on your definition of friction. Think "Judo" vs. boxing or female competition vs. male competition.

But you can be sure that certain frictions will be eliminated in the quest for some of us to live a more comfortable life.

A lot of people will jump on the anti capitalist/anti consumption bandwagon if it means a free lunch, of that you can be sure.

Thai said...

Anon of the anti immigrant bent above, I am taking a more zen approach and do like to cooperate with people.

Don't you think you would enjoy spending more time at a site where you can chat with people of similar moral viewpoint to feel a little less friction?

yoyomo said...

"If you are looking where to invest and how to get rid of this debt..."

Stop gallivanting all over the globe with excessively equipped troops trying to push other people around; that would probably make a sizable dent in the debt.

I didn't post any links on psychology or torture, at least I don't recall.

dink said...

@ Hell:
"Sudden Debt's Spawn-Off"

Hell, you rock! Can Hell have demon spawn or would that be redundant? ;)

I quite clearly have no idea what I'm doing, but its an entertaining experiment. And it gives you a place to ship the unruly (cyber-Australia?).

@ Debra,
"I'm too dumb to post on your blog"

I was too dumb to post on my blog too. I had to log in under my google account to make it work. Its a learning experience for all to suffer.

@ Thai,
"Anyone interested in a stab at what kind of companies/groups/teams these might be?"

That reminds me, Hell owes us a post on alternative energy companies. There was some conference he attended a few weeks back.

@ Yoyomo,

You mentioned tragedies involving Slumdog Millionaire. Did you know Mumbai have over 18 million residents? Numbers like that make me hyperventilate.

Anonymous said...

There is a structural reason that the housing bubble replaced the high-tech bubble. Houses cannot be imported like manufactured goods, although much of the content in houses, such as furniture, hardware, windows, kitchen equipment and bath fixtures, is manufactured overseas. Construction jobs cannot be outsourced overseas to take advantage of cross-border wage arbitrage. Instead, some non-skilled jobs are filled by low-wage illegal immigrants.

Total outstanding home mortgages in 1999 were US$4.45 trillion and by 2004 this amount grew to $7.56 trillion, and by 2007, $11.2 trillion, most of which was absorbed by refinancing of higher home prices at lower interest rates. When Greenspan took over at the Fed in 1987, total outstanding home mortgages stood only at $1.82 trillion. On his watch, outstanding home mortgages quadrupled. Much of this money has been printed by the Fed, exported through the trade deficit and re-imported as debt.

Anonymous said...

Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation must be tolerated. The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low- wage working poor, and not by the owners of capital the monetary value of which is protected from inflation.

Inflation is deemed benign as long as wages rise at a slower pace than asset prices.That has been the basic problem of the global economy for the past three decades. Low wages have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default.

Debra said...

I think that we need to rethink ALL of the major economy questions, like the meaning of credit, the meaning of work, of property. We need to be talking about things like this on blogs all over the world.. (well at least the country...)
The inflation/wages comments that our last anon stuck on flesh out Hell's previous post about wages/debt.
As I say, there is a REAL DIFFERENCE between having your immateriel filthy lucre in ASSETS/CREDIT, and having it in the form of wages.
It is apparent to me that the financial markets are working in ANTAGONISM to the real WORK based economy (in the sense of work as it is currently, and restrictively defined...).
Assets are a rather ARISTOCRATIC vision of wealth, aren't they ? If I understand the word correctly, and I may not.
It seems to me that most of the troublesome problems happen whenever we try to ACCUMULATE wealth, right ? For whatever reason.
I will switch to Firefox, but I'm still talking about financial/economic issues here...

Debra said...

Geez, you guys, Firefox or not it just doesn't work.
When I get to open ID/url, just WHAT am I supposed to type in ?
Why doesn't the new blog have the possibility of going down to Name/url, like Hell's blog does ?
Can you fix this or explain to me what I need to do, considering that I am an antisocial woman who doesn't really like SIGNING UP FOR ANYTHING these days... Too many potential internet coppers out there, you know...

yoyomo said...

Yes, I did know that Mumbai had a population in the teenions and this is the link to Slumdog.Debra,
Try first signing-on at this site then jump over to Dink's; your ID may carry over with you.

Not to quibble but there is no such thing as a "Spawn-Off"; might you be thinking of spin-off instead?, but then that would be an infinitesimally minor detail compared to the killing and raping of millions of people in some poor country to an alleged non-imperialist.

yoyomo said...

blogger keeps deleting the spacing between paragraphs

Hellasious said...

Re: "Spawn-off"

An obvious word-play...

The Spawn of Sudden Debt have been Spinned Off to a sister site..

I LOVE torturing words... For example, "Hellasious". There are several messages hidden there...

Have fun deciphering..


Thai said...

Click on "Comments" (last I checked there were 16) and then go to the very bottom of the page where you can leave your comment in a sign on box which is all the way down at the very bottom of the page. You have a choice of how to sign in and just use your Google Account sign on.

Camabron said...

S&P 500 P/E ratio at record high in the 120's !! Talk about a dead cat bounce, see chart

yoyomo said...

"Have fun deciphering.."

What I'm at a total loss to decipher is your non-reaction to the advocacy of (and the mocking of) the killing and raping of millions of people in some poor country. You promptly deleted several comments using the N-word and the one you didn't delete, you made plain your disdain for the bigotry of the commenter.

As an avowed (or so you claim) non-imperialist, are you comfortable with that comment appearing on your site without
(aside from my outburst of profanity) challenge?

Joe said...

"Have fun deciphering.."

I did that last week but here goes again. The beginning was the Fed coup of 1913. See masthead quote for the reason of said coup.

The end is hell due to the unpayable iou (debt) load. All fiat ends this way.

In fact, I have come to believe that the Humpty-Dumpty parable was actually written to stealth describe what a fiat currency really is.

HD is the fiat currency and the wall he sits on represents empire. When he falls who comes to his rescue, none other than all of the resources of the king himself. (Paulson, Bernanke et al)

Of course, once a fiat reduces to zero it is game over just like an egg breaking.

The egg shell also represents the fragility of a fiat currency. More importantly, the egg represents future life and once the USD collapses it is game, set and match for the future US Empire.

The is no question about the outcome, only the timing, which is closer than anybody realizes.

Joe M.

yoyomo said...

Three links that mirror the sentiments of your comment; Link A, Link B, Link C.

Thai said...

@Joe (this is related Hell), is there ANY chance your mental model of humanity/human society might be a bit rigid and that certain outcomes could be different if humanity actually is different than you think it is?

California just rejected their Amendments. Some people will have serious issues as a result and I think it fair to say that many people will seriously look at their behavior and some will make changes.

@Hell- Dink, myself and SS (and any others that want to help- I hope Deb, Cotton, Marcus and Yo all join) are going to play a "fractal game" in order to see if we can predict the next great investment. We will reproduce our recommendation when it is ready (this can't be done without multiple people cooperating).

I ask my question again, to help narrow our work down somewhat- how large an investment and what kind of return gets your attention?

It is the goalpost so to speak that we will be striving for.

Joe said...


All one need do is look at history and see that what is happening today has happened thousands of times over.

Why? Simple. The nature of man is an absolute. Period. Now that is not to say that all is lost as I do believe that universe favors humanity.

As such, I believe we will become enlightened at some point and join universe.

Until that happens history repeats.

Joe M.

marcus said...


Electricity: All facets of production, transmission, storage, and utilization.

yoyomo said...

Sarcastic humor at its best.

This strikes me as more satirical than Colbert's piece which was very funny but was so close to the truth that it could be characterized as a re-enactment of the crime with the names of the guilty changed to protect the innocent from retaliation.

yoyomo said...

Link for Colbert's piece and a somewhat related cartoon.

Debra said...

@Debra & Dink
The blog has to allow for anonymous comments before Debra can post comments the way she does here (ie. "Name/url")

Go settings>>comments>>who can comment?>>anyone - includes anonymous users

Technically speaking, yes, "Debra" can be without identity.

Debra said...

Open ID is different from Name/url, because u need a unique identity.


That's how Debra was able to comment on Dink's blog: through her blogger account. Nothing related to internet browsers, i think.

if you really want to get rid of anonymous comments, stick to using aforementioned blogger account for miscellaneous comments to avoid confusion.

dink said...

@ Anon,
"1987 $1.82 trillion
(12 years)
1999 $4.45 trillion
(5 years)
2004 $7.56 trillion
(3 years)
2007 $11.2 trillion"

Bad. Very Bad.

@ Yoyomo,

I wonder if MBAs are going to start taking it off their resumes. It just screams "Enron" to the future employer.

BTW, last week Colbert debated himself with faux commencement speeches at Prescott University and Prescott Institute of Technology. You might also want to google "Prescott Pharmaceuticals" or "Colbert White House Correspondant speech". The man is outrageous.

Joe said...

I believe the next big investment opportunity is physical Gold/Silver with emphasis on Silver.

Remember, G/S have been money for 6,000 years and have attended the funeral services of over 3,000 fiat currencies.

It will protect you/yours against the Humpty-Dumpty-USD.

Joe M.

Thai said...

We tried to get Hell to talk about gold on several occasions, best would could get is "I don't know" but he thinks Gold barbaric.

This gold issue does remind me, does anyone know if US debt holders have any kind of payout hierarchy in the event of US bankruptcy (albeit an unlikely event).

e.g. would TIPS holders get paid first, then long term treasury holders, etc...?

I looked around but have not been able to find anything.

marcus said...


If you are really talking about "...the next great investment." then my answer stays the same (electricity) if you want to make profits for the short term (3-5 years), metals, oil, and gas.

Thai said...

Thanks Marcus. :-)

Do you have a link for electricity to steer me towards?

yoyomo said...

I'll give it a try, thanks.

Anyone interested in the role currency speculation might play in triggering out-of-control inflation may want to check out this (longish) analysis of the German experience in the 20's vs. the 30's. A completely new perspective to me and very plausible.

yoyomo said...

BTW Dink, I was referring to the cartoon; the juxtaposition of spread sheets and bat excrement was richly deserved scorn.

Thai said...

Joe, I came across this while doing some other reading and it kind of reminded me of our discussion (it is relevant to decision making, doomerism and the markets in general).

Anyway, I just thought you might enjoy another perspective.


Joe said...


Thanks for the link and I do agree that fear can put us into unnecessary danger.

However, in my case, what one may perceive as fear another may take it as a need to be prepared. My hope is it's the latter case. The saying of prepare for the worse and hope for the best comes to mind.

Joe M.

yoyomo said...

More reassuring (not really) discoveries about the flu.

marcus said...

Thai, are you interested in evidence for my thinking or individual firms involved in the business?

Briefly, the dynamics for migration toward a more electric country go to the demand/supply curve. Certain vehicles will have to stay with liquid fuels (aircraft and large trucks). Demand being pushed by export production and competent cheap car producers in China and India.
Supply of course inching toward the peak.

A cynical move would be investment in coal. This is the cheap and dirty way out of the thermodynamic box, but the environmental costs would be hell.

The individual players in the field are easy enough to find. There are specialists in production of solar cells, wind turbines and nuclear facilities, and gas and coal facilities.

Transmissions lines are similarly built by a few large construction/engineering firms.

Look at the leading companies in storage research and production.

As far as cars and small trucks, hybrid and all electric will be an easy way to meet the needs for more fuel efficient fleets. GM after bankruptcy, may even be a good bet for electric vehicles but Honda and Toyota have a big head-start.

Joe said...

From Jesse's Cafe today:

"We are now in the endgame of an historic credit bubble that will result in a currency crisis of epic proportions."

I am not the only one that sees the USD as a spent currency. (pun noted)

BTW, Gold/Silver are the inverse of the USD and will go parabolic, at some point.

Joe M.

Debra said...

Yoyo, I looked at the "sarcastic humor", but am not really sure that it is either sarcastic, or humor, but it doesn't really matter...
I have already said here that you really should look up the date on Mr Smith Goes to Washington. I think it was made in the 1940's. So, I'm saying that I agree with Joe on this one, it is a universal truth that power and money, either/or AND; corrupt absolutely, and ever since we came down out of the trees.
In France, the MBA problem is really tragic : concerned parents urge their youngsters to get economy degrees and MBA's in DROVES, because everybody is worried about how to EARN MONEY to eat at a future date, and Europe's youth is in an even more unenviable position than the State's youth, endgame oblige, as we say...
Slumdog says it all, in my book. The total, pig farm smelling corruption of fiat currency.
I know that I sound like an extremist, but then I AM ONE.
And all those technical comments here that are attributed to me by Blogger ? SOMEONE HERE HAS USURPED MY IDENTITY... See what I mean ? LOL

Thai said...

Marcus, my interest is in your thought process.

Where is the "bang for the buck" in electricity so to speak, the non-linear part of the system where small changes make big impacts (like getting rid of the lease efficient parts of the system).

And how does one "invest" in electricity? Is there an ETF?

yoyomo said...

You have to click once or twice down the page to get to the cartoon. I'm sorry I didn't make that clear; the article itself is just a straightforward look at the culpability of MBA's (only 20 years too late). If you want a good scare, look at the article on the flu and the article on currency speculation is long but very informative.

Yophat said...

Crossed the tipping point in the ability to collectively take on more in negative GDP territory so the more debt we take on....the faster the economy is destroyed!

Solar Attic Fan said...

It's all so hard to comprehend.

Jogger Strollers said...

Crazy Spending

repossessed cars said...

I have to agree with the references to silver / gold - we all know they're going up in price but is anyone really investing to get more? There are still old mines here in UK rich for the taking. They just need feasibility studies and some real tech going into them.

repossessed cars

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