Tuesday, August 23, 2011

Sudden Debt Redux: Where Are We Now?

Sudden Debt was started five years ago warning of excess in debt, asset bubbles and the end of the "Permagrowth" model.  Today, some of the most egregious excesses have been reversed or at least arrested after wrenching and painful adjustments to the real economy.

Here are some relevant charts (all apply to the United States).
  • Total debt as a percentage of GDP is still extremely high, but at least it has stopped growing.
  • The debt service ratio has come down significantly, mostly through rock-bottom interest rates engineered by the Fed.

  • The personal saving rate is rising, even if only slowly.
  • Residential real estate, the biggest bubble of them all and Mr. Greenspan's biggest mistake, has burst spectacularly.

The charts above tell me, at least, that the Permagrowth model of the US (and global) economy is finished and must be replaced with something entirely new.  I simply cannot imagine that we will just roll over and once again start pumping the same old bubbles of consumption, debt and real estate as remedies for "low growth".  History teaches us that it can't be done: once a bubble is burst it stays burst for a long, long time and any attempts to re-inflate it ends in wasted time and resources  (Just look at Japan..).

What we need, instead, is a paradigm shift.  My choice is to focus on raising earned income and savings,  investing the surplus in renewable energy and resource management, basic R&D and technical education.


  1. Impressive and enlightening list of USD-positive items.

    Thanks for pointing them out. I am especially impressed by the debt service ones! I was unaware that it was so low. It looks like the engineering did work...

    At least they go hard against the current media and financial bloggers consensus:) Except for Mish and a few others.

    The charts above tell me, at least, that the Permagrowth model of the US (and global) economy is finished and must be replaced with something entirely new.

    This kind of statement is typically American. IMHO in a good way, it shows very high confidence in the future... And in a bad way as well, since it shows very high confidence in the future.

    Northern Europeans would say:
    The charts above tell me, at least, that the country has started to rebalance towards more capital production and saving and less consumption. We will discuss other options later when the money is in the bank

    Of course the truth lies between the two.

    The chances of a silver bullet are quite limited. But isn't "something entirely new" a bit too much to expect? At least from a short term standpoint.

    IMHO Solar techs are not going to save the world any more Hi-Tec did in its times.

    Not discounting Hi-Tec by the way. No more than I do for Green technologies.

    But I do not expect them to allow for a continuation of the current set of massive short term intractable international financial in-balances.

  2. Residential real estate, the biggest bubble of them all?

    Mirror mirror on the wall, what's the the biggest bubble of them all?

    It wasn't the residential real estate market, impressive though it was. It was, and is, the U.S. Bond Market.

  3. To Edwardo: The excesses in the US bond market are mostly a consequence of the RE bubble, through the securitization of mortgages.

  4. The excesses in the U.S. bond sphere predate and postdate the real estate bubble.

  5. Dear Edwardo,
    Compare the total debt and RE charts in this post. Notice what happened to both starting around 1994-95...

  6. Thinking about these charts with respect of the UK, and how they differ. Firstly the gubberment here has actively tried to prop up the nominal value of the real estate bubble (which dwarfed the US), through ultra low IR,QE and just paying the interest on the mortgages of the unemployed. As the majority of mortgages are short term variable rate this has massively reduced mortgage costs. There has been NO rebalancing however, the arrested nominal crash has led to a belief that bubble growth will return, property programs infest the airwaves, and people believe that what is being played out is repeat of the property bubbles of the 70's and 90's, when nominal double digit wage growth eroded personal debt levels.

    I do think that over in the US, you've managed to purge yourself of the malinvestment in real estate, and as a consequence stand a better fighting chance than the UK. By denying an entire generation of the security of shelter as a base to work for a better life you're only storing up social unrest for the future, err hang on........MORE social unrest for the future. As my wife says, they will ALWAYS take it out on the young, until demographics say otherwise (see Arab Spring)

  7. The excesses of the U.S. bond market is largely a result of the bubble RE, through the securitization of mortgages.

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  9. Hellasious,

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