Saturday, August 25, 2007

The Inflated Asset Economy

They say a picture is worth a thousand words and I agree, so here is a post of a few thousand. The focus is on how the US economy was transformed over the decades from an industrial economy to virtual reality one, based on assets and debt. Sadly, it doesn't require too many "pictures".

  • The Demise of The Industrial Economy
The demise of manufacturing has been spectacular, both as a percentage of GDP and jobs.. This is what we really mean when we say "globalization".

What about the service economy? Great, as long as we also keep the industrial base intact, not out of some sentimental reasons but because it is the creator of technology upon which we all depend.
  • The Rise of Assets and Debt
Making things as a way of adding value to the economy has been replaced by pumping up financial and real estate assets and borrowing against them, in order to replace income that has been lost from de-industrialization. Look at the way household debt has zoomed versus income - a double in 15 years.

*Total financial assets minus deposits and un-incorporated business equity

It does not take a rocket scientist to figure out that what is happening is dangerous. How is all this debt going to be serviced? So far we are doing it by issuing even more debt, purchased essentially by China, Russia and the Oil Cartel. I don't think they will keep the pyramid scheme going for too much longer and a global superpower cannot and should not depend on the lending practices of others.


  1. Hi, May i know where you get your data from? Sorry, I'm not doubting the credibility of the charts. I just want to look at the source and get more details.

    Thank you.

  2. hq,

    not to answer for hellasious but i would assume it comes from various official sources such as FRB releases.

    if interested in methodologies then 'fine print' in these would have to looked at but if the desire is disaggregation then try either the BEA's national income and product accounts and/or

  3. The Federal Reserves Household Debt Service and Financial Obligation Ratios give a better idea of how todays household balance sheet compare to those of the past. They can be found here

    The debt to disposable income ratios don't reflect the much lower cost of debt today relative to the 1970's and 80's.

    The FOR and DSR show that home owners are more stretched in the past. Renters are in-line historically.

    Nothing I've seen really gives a great view into household finances. For example, the FOR and DSR ratios are influenced demographics. Young people are more likely to have high debt ratios than those closer to retirement. Also, DSRs for the entire population don't mean much. Household A's ample income does little to offset household B's debt payments when the bills come due.

    What I'd really like to see is what percentage of US households have assets in excess of debts. In other words, what percentage of households are solvent.

  4. It's not the historical householder solvency that's relevant. It's crystal clear a RE crash is occurring. The HH assets:debt ratio will cross within a few months, max.

    The ratio is about to go inverse. That means national bankruptcy. As a foreign holder of US debt paper, I'd be scared and dumping.

    It's obvious to me that now that it's okay to throw in the towel (ABCP, CDO, MBS, etc), it will also be okay to throw in the USD and pull out hard assets, companies, and skill sets.

    The US will soon be bankrupt, in real terms, in terms of householders. It's over; stick a fork in it.

    As in 1922-23 Germany, the stock markets should scream UPwards because the paper is becoming worthless.

    The FedRes should let the member banks' Broker-Dealers declare themselves BK and wipe out huge amounts, trillions, of debt. Hopefully, it will drop external debt too, because not all gov't agencies are backed in fact by the Feds. Let it go. The world's economies will restart. If not, the serfs should rise up and say they're mad as hell and not gonna take it anymore. We know for sure that Greenspan dudn't give a horsefeather, Bernanke thinks the solution is academic, and Paulson can't separate himself from his Goldman Sacks membership. Foolish vanity, with a sledge hammer wallop to the USD as a store of value.

    Soon trading greenbacks for EU dimes.

  5. Most people have some sense of this -- the buildup of debt. People buying houses, expensive cars, (over-)using credit cards, etc. They hear about the federal budget deficit and Congress raising the debt ceiling regularly, as if it was an afterthought. A natural follow-on is to wonder about a carrying capacity for debt: is there one? If so, what is it? Can it somehow be calculated? If there is such a threshold, we obviously have not reached it yet, as there has been nothing that could be called a financial collapse. What are the factors forestalling it? Foreigners buying US debt is commonly mentioned, as is the fact that there may be problems if their appetite for assets denominated in a depreciating dollar should wane. All of that makes sense. But the lack of serious macroeconomic consequences has made people complacent. Is that about to change? I guess we'll see...


  6. Re: Data sources

    I am usually scrupulous abt. providing data sources - I got lazy this time, sorry.

    The debt, income and GDP data come from the Fed, the quarterly Z.1 report.

    The jobs data come from the Bureau of Labor Statistics.

    The manufacturers' shipments from the Census Bureau's extremely helpful page on comprehensive economic data.

    I have to agree with "kicker" that aggregate data do not provide a clear picture of the situation. Averages and medians are becoming increasingly less important as income and wealth discrepancies have increased sharply within the US economy.


  7. Hellasious,
    no doubt about the debt problem. I think your first chart showing that the US has become a minor player in manufacturing explains perfectly why the recession has not started yet and as usual. The service sector has avoided a the Us economy a recession. but guess what : what is the core of the service sector ? retail and financials....
    best regards

  8. GaudiaRay,

    Do you have a source for the

    I'm not sure that traditional metrics really capture our economy anymore.

    For example, a US company designs a chip that can replace almost a dozen chips in a new HD-DVD player. The design is transferred to their subsidiary in a tax haven who has the chip produced in a fab in Taiwan. The chips are then sold to a Chinese manufacturing company which builds a HD-DVD player. The player is shipped to the US, sold to WalMart, and then sold to a consumer for $150.

    The Taiwanese and the Chinese maybe had $5 in margin on the product together. Heck, WalMarts margins are better. The chip designers made bank. There margin on the chips was probably $25-$50.

    On paper, this deal looks horrid for the US. Nothing was exported from the US except for bits. The profits of the off-shore subsidiary are held in US bank accounts but show up as foreign holdings. But, was the deal really bad?

  9. Sorry, do you have a source for the The HH assets:debt ratio?

  10. Guys,

    Sorry if off-topic, but what is one to do with all these realities, other than to get a bottle of wine and sail into the sunset? I mean, for an average guy who wants to come home, kiss his wife, hug his children and retire after 40 years of "work ethics"... I am at a complete loss here... My best response so far has been some regular sessions with a shrink... Not the best way to improve household finances, and I doubt it would work on a national level...

    Looking fwd to your comments.

  11. Kicker said "... do you have a source for the The HH assets:debt ratio?"

    Look at the two charts in the body of this article. Then think for a moment about what's happening in the jobs market, and seriously consider the multiplier effect, and its knock on effect.

    Mish believes as do I, and it ain't hard to do, that jobs are going to shrink. I think they're already shrunking quite dramatically, aside from the RE finance industry that just lost more than 1/2 its minions. (As an eg, the irrigation and construction site pipe company here is "slow". They didn't hire their normal 4th guy for the summer. For the past 45 days, it's been "slow". RE construction is finishing out, and I see none, but there's gotta be a few, new projects starting. The construction industry has left unemployed hundreds of thousands of guys, most the Jose's. Does this impact on other industries? Absolutely. This morning, at the moderately high end cafe in town, the waiting line was nearly zilch. Maybe everyone is resting up for Labor Day Weekend?)

    The loss of all those J6P's from the labor pool will bite. Of course, unemployment claims and their extension by the Feds, will dampen the impact...for a while.

    I see no way that unemployment checks should even be considered in HH income stats. We've seen a surge of credit card buying at retail stores, and that's because the boys and girls are tapped out. Old fashioned Econ101A, Micro, tells us people have a very difficult time changing their spending habits. So, what is to be expected is that they will hit the wall. Then it will be over.

    Look at the two charts. Adjust one in your mind for the reality of the present...lots of job losses in the service industries of construction and RE finance, and the impact on retail sales across the board. Even new car sales are telling us that the jig's up (excluding the fleet sales which conveniently happened along, but I would have guessed would have been extracted, in honest and normal accounting.

    But alas, honesty is the scullery maid. Yet, she's now having her day.

    As an aside, markets move in different psychological ways. If you look at early and mid 1929, you can see a market sentiment /environment very much like this one. I termed this type of market "brittle". It's in denial, stubbornly refuses to turn back on itself and adjust its gains, and then it just breaks, severely.

    Only an expectation of continuing inflation will postpone this break. But I'll bet dinner in the best restaurant in NYC in December that the equity market will soon break.

    Humans don't do well with anxiety; like a dog when it starts a up a hike up a steep trail, the first thing it does is unload excess baggage. Humans too, imo, can't handle the psychological pressure. They're "out", or they're gonna get out. I think I know of what I speak as one vivid example were my parents who bought RE in late 1946 and how they worried that drop.

  12. GaudiaRay,

    I agree, but nobody really knows how far the rubber band of consumer debt can be stretched right now. The data is all over the chart.

    For example, same store sales data. Walmart's same store sales data in July was dismal. Target's was stellar.

    Poor execution at Walmart? Shoppers moving up-scale? Growing wealth discrepancies in the US?

    July's consumers spending growth at 3.6% annualized but credit card balances jump 11%.

    Optimistic consumers loading up on debt in anticipation of future income growth? Or one last hurrah before sitting down with the bankruptcy lawyer.

    Personally, I'm watching credit card delinquency rates like a hawk. I've seen enough bankruptcies first hand to know that credit cards are the last line of defense for a tapped out household. When those start to trend upward, we'll know we're near the end.

  13. where can we get the credit card delinquency rates?

    Any idea where we can get the latest figure?

  14. Re: Data, again

    The raw data comes from the sources I mentioned b4 (Fed, BLS, Census). Ratios, etc. are calculated by yours truly (thx. Excel..)

    On credit card delinquency rates: The Fed has the data:

  15. Personally, I'm watching credit card delinquency rates like a hawk.

    Credit card defaults seen climbing, report says