The "300% total debt tipping point" hypothesis
 

A friend and I were chatting this past weekend about the severity of the debt crises afflicting the various 'developed' - I put the latter in quotes because as much as anything else the term seems to be a euphemism for 'having perfected the ability to blow massive debt bubbles in order to mask real-economic stagnation and even decay' - nations, in particular why some countries (e.g. Spain) were seeing the sovereign debt downgraded even though the level-versus-GDP is not at the 90-100% level considered dangerously high by historic standards. I opined that the key correlate of "national credit crunch" seems to be not the level of any one broad form of debt but rather the sum total of *all* debts, public and private, and the level a which this seems to reach a tipping point (in the sense that added debt issuance produces zero or even negative economic return) appears to be universally around 300% of GDP. Denninger has a piece today which gives a breakdown of the U.S. debt totals - Notice the shocking rise in both debt and GDP (but especially the ratio) since 1980:

[URL="http://market-ticker.org/akcs-www?post=199375"]Economic Policy Journal: Utter Nonsense[/URL]
[quote]That's not inflation eh? Hmmm... the actual peak was in roughly 2000, which would mean we actually saw about 14% inflation. Then we rattled around for 10 more years trying to figure out how to [U]prevent[/U] the deflation of that bubble through various forms of scams and frauds (Internet and housing bubble anyone?)

I can find plenty of other examples of course. [B]You could look at debt in the system too - according to The Fed Z1 it was $4.4 trillion all-in -- Federal, State, Local, personal, business, etc -- in 1980. Today it's about $53 trillion, which happens to be about an 8.5% inflation rate annualized.[/B]

See, this is the problem with the BS and games -- you don't change the outcome, you just hide the ugly somewhere. In this case where it was hidden was in a series of Ponzi-style economic bubbles.[/quote]Note that in 1980 [URL="http://www.usgovernmentspending.com/us_gdp_history"]US GDP[/URL] was around $2.8 trillion, in 1990, 2000 and 2010 it was 5.8, 9.9 and 14.6 trillion, respectively. Over the same span, the total public+private debt rose from $4 trillion (143% of GDP) in 1980 to a mind-boggling $53 trillion (364% of GDP) in 2010. The crossing of the 300% level coincides quite closely with the peaking of the housing+credit bubble in 2006. The total has continued to rise by around 10% per year since, not because housholds are leveraging uo - they are deleveraging, albeit painfully slowly relative to what is needed - but corporate America and most-especially the government - have piled on debt faster than ever (at least post-WW2) in the past 5 years. (Most of the news stories about "US corporations sitting on record piles of cash" neglect that they are also sitting on record piles of debt, in no small part because the Fed's misguided ZIRP policy has allowed them to borrow for future 'rainy days' or hoped-for economic rebounds at record-low rates.

Also keep the above GDP figures in mind the next time you hear some government/central-bank authority blather about "targeting moderate inflation of 2%" - even normalizing for population (or more accurately, workforce size) the above explosion in GDP over the last 30 years implies a much higher rate of inflation than 2%, and the total debt implies an even worse rate, approaching 10%. As Denninger notes, debt growth is the tried and true way governments have of overspending without explicitly taxing to cover the shortfall.

I will see if I can dig up analogous total-debt stats for other countries in future posts.

Why wouldn't this growth also correspond to the amount of pension commitments? On a simple macro level, there is a limit to the number of retirees that a worker can support, and with that nice, fixed retirement age (65) we have, and almost everyone living a decade or more beyond it, it seems to me we have a huge, non-productive sector.

Barry Ritholtz has a nice commentary on a NYT piece on Fannie, Freddie, and the lies Republicans are telling about them (he notes that the truth is ugly enough, but the lies better serve the GOP's political ends, which is to shift the blame for the financial crisis from Wall Street and years of GOP-aided deregulation and insane-risk-taking-support thereof, to the "socialist government props to the housing market which they paint the GSEs as being"):

[url=http://www.ritholtz.com/blog/2011/12/real-sins-not-imaginary/]GSEs: See the Real Sins, Not the Imaginary Ones[/url]
[quote]Joe Nocera’s latest in the NYT, An Inconvenient Truth, is an interesting look at the SEC case versus those six GSE execs.

Note that Nocera has been dead right about Fannie & Freddie, The GSEs were bad enough, had engaged in enough accounting fraud, lobbying excesses, regulatory capture, all with vastly inadequate capital for their bizarre hybrid model — that critics don’t have to make stuff up. The reality is ugly enough:
[i]
“Eventually, their quest for profits led them to make a belated, disastrous foray into subprime mortgages, which ended with their collapse, and which has cost taxpayers about $150 billion. Tragically, Fannie and Freddie could have led a housing recovery — if they hadn’t become crippled wards of the state instead.

Yet these real sins have been largely overlooked in favor of imagined ones. Over at the conservative American Enterprise Institute, two resident scholars, Peter Wallison and Edward Pinto, have concocted what has since become a Republican meme: namely, that Fannie Mae and Freddie Mac were ground zero for the entire crisis, leading the private sector off the cliff with their affordable housing mandates and massive subprime holdings.

The truth is the opposite: Fannie and Freddie got into subprime mortgages, with great trepidation, only in 2005 and 2006, and only because they were losing so much market share to Wall Street. The reality is that Fannie and Freddie followed the private sector off the cliff instead of the other way around.”
[/i]
Next, we get to the SEC’s case against the GSE execs. I hope they are solid cases, and we begin to get some real convictions versus the banking execs who were so reckless and dangerous.

However, Nocera fears that the SEC used a rather expansive definition of SubPrime in the claim against Fannie and Freddie’s CEOs and others. The SEC may even have pulled a page straight from GSE crazies Peter Wallison and Edward Pinto. If that is the case — and I am not yet convinced it is — the SEC claims will be weaker than originally believed.

I hope Nocera is wrong . . . but I would not want to bet against him.[/quote]
[b]
All is well in Spain agin, magically:
[/b]
[url=http://links.reuters.com/r/NG7YL/5NAZC/DWA0N4/769ZO/DWTAD1/YT/h?a=http://links.reuters.com/r/NG7YL/5NAZC/DWA0N4/769ZO/KQ0WYK/YT/h]Spain borrowing costs dive[/url]
[quote]MADRID (Reuters) - Short-term financing costs for euro zone struggler Spain more than halved on Tuesday as banks lapped up debt at an auction, with much of the purchasing power said to come from cut-rate money to be lent by the European Central Bank.[/quote]
It's called "frontrunning the ECB" - buy debt in full knowledge {or in the belief] that the ECB is gonna take it off your hands soon at a guaranteed profit-to-you ... and t has 0 to do with actual market demand for Spanish bonds. Interestingly, ZeroHedge opines that the banks who are gobbling up Spanish sovDebt as a result of that expectation-of-guaranteed-risk-free-profit [url=http://www.zerohedge.com/news/summary-wall-street-expectations-tomorrows-hail-mary-ltro]may be in for a surprise[/url]. I'll take the under on the 'surprise' bit - I believe folks purchasing in that kind of volume know that one way or another the central bankers will make their bets money good.

And speaking of falsely-optimistic signals being read into the latest "economic" data by the pundits:

[url=http://www.reuters.com/article/2011/12/20/us-economy-idUSTRE7BE12S20111220?feedType=nl&feedName=ustopnewsearly]Housing starts hit 1.5 year high in November[/url]
[quote]WASHINGTON (Reuters) - Housing starts and permits for future construction jumped to a 1-1/2 year high in November as demand for rental apartments rose, suggesting the housing market was starting to recover.[/quote]
The housing market has been "starting to recover" for what? 2 years running now? Rather like the employment picture "starting to improve" quarter after quarter, even though the actual total number of *jobs* mysteriously continues a slow, relentless decline. Anyway, the (alleged) single-family builidng rise in the data - 2.3 percent - is well within the margin of error of the data series, i.e. should be considered nothing more than noise. More meaningful is the multi-unit construction starts, which rose by 25%. What does that tell us? That demand for rentals is very strong. That is a sign of ongoing ecnomic weakness, people not wanting to extend themselves financially with the job market still in the shitter. (I base that characterization on an obscure metric called "trends in number of people actually working", not the BLS-massaged funny numbers). With a finite pool of homeseekers in the market, that demand for rentals must come at the expense of something. And the article does not even mention the huge "shadow inventory" of bank-owned homes which have yet to come onto the market.

The obligatory sell-side spin embedded in the above article is especially rich:
[quote]"Investors should take heart that if Europe doesn't melt down and Congress figures out how to extend the payroll tax cut, the economy can continue to gain momentum," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.[/quote]
Dude, that is a mammoth pair of "ifs" you just threw out there. As in, if my aunt were man, she'd be my uncle.

But it's all good - It doesn't need to be true, it just needs to be convincing enough to the financial-bubbleheads to ignite the latest "buying panic" in the markets. These - and the entirely predictable selloffs which follow hard upon - have become quite a regular occurrence of late.

Time to start the EOY review of economic predictions for 2011, and making-of-ones-for-2012.

Mish reviews his own [url=http://globaleconomicanalysis.blogspot.com/2011/12/bernanke-spreads-happy-dust-did-economy.html]Ten Economic Calls for 2011[/url] - He had a very good predictive year there.

ZeroHedge's Bruce Krasting does not run down his previous year's prognosticational success, but offers a long list of predictions (not all economic, some purely whimsical) [url=http://www.zerohedge.com/contributed/2012-things-will-happen]for 2012[/url].

Karl Denninger scores himself for 2011 and makes/recycles predictions for the coming year in [url=http://market-ticker.org/akcs-www?post=199758]2012, The Big Suck[/url].


And on a mood-of-the-nation theme, blogger Joshua Brown of [i]The Reformed Broker[/i] has an end-of-year missive to the JP Morgan CEO regarding the latter's dismissive take on the Occupy Wall Street movement:

[url=http://www.thereformedbroker.com/2011/12/20/dear-jamie-dimon/]Dear Jamie Dimon[/url]
[quote]Joshua M Brown
December 20th, 2011

Dear Jamie Dimon,

I hope this note finds you well.

I am writing to profess my utter disbelief at how little you seem to understand the current mood of the nation. In a story at Bloomberg today, you and a handful of fellow banker and billionaire "job creators" were quoted as believing that the horrific sentiment directed toward you from virtually all corners of America had something to do with how much money you had. I'd like to take a moment to disabuse you of this foolishness.

America is different than almost every other place on earth in that its citizenry reveres the wealthy and we are raised to believe that we can all one day join the ranks of the rich. The lack of a caste system or visible rungs of society's ladder is what separates our empire from so many fallen empires throughout history. In a nation bereft of royalty by virtue of its republican birth, the American people have done what any other resourceful people would do - we've created our own royalty and our royalty is the 1%. Not only do we not "hate the rich" as you and other em-bubbled plutocrats have postulated, in point of fact, we love them. We worship our rich to the point of obsession. The highest-rated television shows uniformly feature the unimaginably fabulous families of celebrities not to mention the housewives (real or otherwise) of the rich. We don't care what color they are or what religion they practice or where in the country they live or what channel their show is on - if they're rich, we are watching.

When Derek Jeter was toyed with by the New York Yankees when it came time for him to renew his next hundred million dollar contract, the people empathized with Derek Jeter. Sure, this disagreement essentially took place between one of the wealthiest organizations in the country and one of the wealthiest private citizens - but we rooted for Jeter to get his money. Nobody begrudged him a penny of it or wanted a piece of it or decried the fact that he was luckier than the rest of us. In the American psyche, Jeter was one of the good guys who was deservedly successful. He was one of us and an example of hard work paying off.

Likewise, when Steve Jobs died, he did so with more money than you or any of your "job alliance" buddies - ten times more than most of you, in fact. And upon his death the entire nation went into mourning. We set up makeshift shrines to his brilliance in front of Apple stores from coast to coast. His biography flew off the shelves and people bought Apple products and stock shares in his honor and in his memory. Does that strike you as the action of a populace that hates success?

No, Jamie, it is not that Americans hate successful people or the wealthy. In fact, it is just the opposite. We love the success stories in our midst and it is a distinctly American trait to believe that we can all follow in the footsteps of the elite, even though so few of us ever actually do.

So, no, we don't hate the rich. What we hate are the predators.

What we hate are the people who we view as having found their success as a consequence of the damage their activities have done to our country. What we hate are those who take and give nothing back in the form of innovation, convenience, entertainment or scientific progress. We hate those who've exploited political relationships and stupidity to rake in even more of the nation's wealth while simultaneously driving the potential for success further away from the grasp of everyone else.

Here in New York, we hated watching real estate and financial services elitists drive up the prices of everything from affordable apartments to martinis in midtown with the reckless speculation that would eventually lead to mass layoffs, rampant joblessness and the wreckage of so many retirement dreams. No one ever asked the rest of us if we minded, it just happened. I'm sure people across the country can tell similar stories.

So please, do us all a favor and come to the realization that the loathing you feel from your fellow Americans has nothing to do with your "success" or your "wealth" and it has everything to do with the fact that your wealth and success have come at a cost to the rest of us. No one wants your money or opportunities, what they want is the same chance that their parents had to attain these things for themselves. You are viewed, and rightfully so, as part of the machine that has removed this chance for many - and that is what they hate.

America hates unjustified privilege, it hates an unfair playing field and crony capitalism without the threat of bankruptcy, it hates privatized gains and socialized losses, it hates rule changes that benefit the few at the expense of the many and it hates people who have been bailed out and don't display even the slightest bit of remorse or humbleness in the presence of so much suffering in the aftermath.

Nobody hates your right to make money, Jamie. They hate how you and certain others have made it.

Don't be confused on this score for a moment longer.[/quote]

I regret to say that at the beginning of 2011 I posted about the U.S. Govt raising the debt limit from @14 trillion to @15 trillion dollars. Today the announcement was made that it will officially be raised to $16.39 trillion. This marks a $1 trillion increase in just one year and sets the stage for a $1.2 trillion increase in 2012.

Can you say "unsustainable"?

[QUOTE]The latest request is the third of three requests authorized by the contentious debt ceiling agreement reached last August and is expected to come on December 30 – the day the debt is projected to fall within $100 billion of the current $15.194 trillion ceiling. The new request asks the ceiling be raised to $16.39 trillion.[/QUOTE]

DarJones

Ah yes it is getting time to close the MET 2011 and open MET 2012. That will be the 5th thread of this series.

Here is a nice little piece to get your blood boiling this holiday season:
[url]http://www.thedailybeast.com/newsweek/2011/12/25/wall-street-has-destroyed-the-wonder-that-was-america.print.html[/url]

[QUOTE=garo;283721]Ah yes it is getting time to close the MET 2011 and open MET 2012. That will be the 5th thread of this series.

Here is a nice little piece to get your blood boiling this holiday season:
[url]http://www.thedailybeast.com/newsweek/2011/12/25/wall-street-has-destroyed-the-wonder-that-was-america.print.html[/url][/QUOTE]

Nice piece - the author is obviously well-acquainted with the work of Yeats. Here is the conclusion:
[quote]At the end of the day, the convulsion to come won’t really be about Wall Street’s derivatives malefactions, or its subprime fun and games, or rogue trading, or the folly of banks. It will be about this society’s final opportunity to rip away the paralyzing shackles of corruption or else dwell forever in a neofeudal social order. You might say that 1384 has replaced 1984 as our worst-case scenario. I have lived what now, at 75, is starting to feel like a long life. If anyone asks me what has been the great American story of my lifetime, I have a ready answer. It is the corruption, money-based, that has settled like some all-enveloping excremental mist on the landscape of our hopes, that has permeated every nook of any institution or being that has real influence on the way we live now. Sixty years ago, if you had asked me, on the basis of all that I had been taught, whether I thought this condition of general rot was possible in this country, I would have told you that you were nuts. And I would have been very wrong. What has happened in this country has made a lie of my boyhood.

There should be more to America, Gore Vidal has written, than who pays tax to whom. It has been in Wall Street’s interest to shrivel our sensibilities as a nation, to shove aside the verities of which General MacArthur spoke at West Point—duty, honor, country—in favor of grubby schemes and scams and “carried interest” calculations. Time, I think, to take the country back.[/quote]

[url=http://globaleconomicanalysis.blogspot.com/2011/12/mish-2012-predictions-2011-year-in.html]Mish's Top Ten Predictions for 2012[/url] - I paste just the headlines here:
[quote]Ten Themes for 2012

1. Severe European Recession as the sovereign debt crisis escalates
2. Political Crisis in Europe
3. Relatively Minor US Economic Recession
4. Major Profit Recession in US
5. Global Equity Prices Under Huge Pressure
6. Fiscal Crisis in Japan Comes to Forefront
7. Few Hiding Spots Other than the US Dollar
8. US Public Union Pension Plans Under Attack
9. Regime Change in China has Major Ramifications
10. Hyperinflation Calls Once Again Will Look Laughable[/quote]
The article is followed immediately by the "Buy Gold and Silver" paid adverts which are ubiquitous on Mish's blog, and Mish has said despite the recent 20% drop from recent highs he is still bullish on gold, but oddly he does not mention whether he considers it a safe haven (say with respect to the US$) for the coming year. I also note he makes no mention of US Treasuries, which he was bullish on for the past few years even as numerous other pundits were predicting hyperinflation/US$-collapse/US-debt-yields-skyrocketing.

As a suggestion for 2012 Ewmayer, why not have a prognostication contest. In the first week of the year, post your 10 best predictions of what will happen to the economy at the local and world wide level. At the end of the year, see who scored the most hits. It would be nice to get participation from as many different countries as possible.

Here is a sample prognostication.

The outlook for inflation is currently at a very very low level. I think it is safe to say that if it continues our illustrious fiscal leaders (Bernanke and Geithner) will eventually decide on another round of quantitative easing to the tune of about $800 Billion.

Please note that $800 Billion as applied by the fed in quantitative easing multiplies 8 times in the economy so you would get a net impact on the world economy to the tune of about $6.4 Trillion.

DarJones

News flash! [QUOTE]Italy seeks bigger euro fund after tough debt sale[/QUOTE]

[url]http://news.yahoo.com/italy-yields-seen-easing-hurdles-loom-081304361.html[/url]

The spin in that article is off the scale. Cutting through all the garbage, Italy has to roll over some E200 Billion in debt over the next 4 months (E450 Billion in 2012 full year!) and the current auctions at 7% interest are scaring the willies out of their finance people. What they are pushing is to increase the European Stability Fund enough so they can keep downward pressure on the yield which will keep them solvent (barely).

To put this in a different perspective, it just means that the EU's problems have not gotten smaller, have not gone away, have to some extent been pushed out a ways, but are still going to come home to roost. The one and only possible conclusion is that nowhere in Europe is safe to stash money. Germany is stable and growing but is going to wind up on the hook to fund the ESF for the rest of the countries. That means Germany is not a safe investment. Portugal, Italy, Ireland, Greece, Spain, and Belgium are already in various stages of a downward economic spiral that will get worse over the next 2 or 3 years.

DarJones

Guess what the top U.S. export is?

petroleum fuels (gasoline, diesel, and jet fuel)

- - - - - - - - -

"In a first, gas and other fuels are top US export"

[URL]http://news.yahoo.com/first-gas-other-fuels-top-us-export-200739553.html[/URL]

[quote]NEW YORK (AP) — For the first time, the top export of the United States, the world's biggest gas guzzler, is — wait for it — fuel.

Measured in dollars, the nation is on pace this year to ship more gasoline, diesel, and jet fuel than any other single export, according to U.S. Census data going back to 1990. It will also be the first year in more than 60 that America has been a net exporter of these fuels.

Just how big of a shift is this? A decade ago, fuel wasn't even among the top 25 exports. And for the last five years, America's top export was aircraft.

The trend is significant because for decades the U.S. has relied on huge imports of fuel from Europe in order to meet demand. It only reinforced the image of America as an energy hog. And up until a few years ago, whenever gasoline prices climbed, there were complaints in Congress that U.S. refiners were not growing quickly enough to satisfy domestic demand; that controversy would appear to be over.

Still, the U.S. is nowhere close to energy independence. America is still the world's largest importer of crude oil. From January to October, the country imported 2.7 billion barrels of oil worth roughly $280 billion.

Fuel exports, worth an estimated $88 billion in 2011, have surged for two reasons:

— Crude oil, the raw material from which gasoline and other refined products are made, is a lot more expensive. Oil prices averaged $95 a barrel in 2011, while gasoline averaged $3.52 a gallon — a record. A decade ago oil averaged $26 a barrel, while gasoline averaged $1.44 a gallon.

— The volume of fuel exports is rising. The U.S. is using less fuel because of a weak economy and more efficient cars and trucks. That allows refiners to sell more fuel to rapidly growing economies in Latin America, for example. In 2011, U.S. refiners exported 117 million gallons per day of gasoline, diesel, jet fuel and other petroleum products, up from 40 million gallons per day a decade earlier.

. . .[/quote]

That article is very misleading cheesehead. The single biggest reason for exporting fuel is that our illustrious congress passed a subsidy that pays fuel producers for each gallon of ethanol blended fuel. They bring oil into the U.S. and convert it into gasoline, mix the gasoline with ethanol, claim the U.S. subsidy, then export the fuel to Europe where they can again claim a subsidy for each gallon of ethanol blended fuel sold. If it were not for the subsidies, U.S. fuel exports would be few and far between.

DarJones