Monday, January 26, 2009
The Debt Depression
I know. You've seen my debt to GDP graphs before and I have been beating you over the head with them but I am entirely convinced that understanding the role of debt is crucial if you want to understand how we got to this current catastrophe. I particularly like the colors in this one. That red ellipse needs additional labels. Put Reagan at the bottom left and Bush at the top right. I have read many cogent articles on the causes of the Great Delamination and I commend them to you for your required reading. One of the best was Michael Lewis et al in the Jan 3rd issue of the NY Times entitled"THe End of the Financial world as we know it" and here is the link:
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=2&scp=1&sq=michael%20Lewis&st=cse. If you are not familiar with Jeremy Grantham, you should be. He is principal at the investment advisor firm GMO and his recent 4th quarter 2008 news letter is a gem. He along with a very few others has been sounding the alarm and here is the link to that report:http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf. Take particular note of his use of the term "Stranded debt." A word of warning: he is not kind to the dearly departed bush administration and he has many doubts about the incoming Obama folks. I will soon add some websites of writers and analysts who I feel are the best of a small bunch of clear heads on this blog. You will note that most of them have no background in economics and it is the classical economists who certainly bear enormous blame for the current predicament. I recall Napoleons's remark about the Bourbons: "They know nothing and they have forgotten nothing."
I have told my wife, and friends and family that no matter how worried and pessimistic I have been, each day brings more news which shows how optimistic I have been. So far things haven't gotten really ugly but the first stirrings of social unrest are showing up in Iceland, Latvia, Lithuania and parts of eastern Europe and it can't be far off in in the PIGS of Europe(Portugal, Italy,Greece and Spain). China looks to a tinderbox and once the clueless underclasses in America wake up we could be in for it here as well. Nothing focusses the mind more than losing your job and your house. If you can stand a lot of profanity, click on the video in the Daily Bail website. It is hilarious in spite of an avalanche of 4 letter words:http://dailybail.com/home/2009/1/25/there-are-no-words-to-describe-the-following.html.
Frankly, I fail to see how the bank bailouts now taking place worldwide will have any useful effect. The debt is simply too huge to print our way out in the US or in the countries with debt problems thjat mirror the US. There are countries with low debt to GDP and many of them are not our traditional friends such as China, Russia and the Middle East. And there is another time bomb ticking and that is Peak Oil and scarcity, availability and price of that, the most important commodity will be a potential coup de grace to a struggling world economy. But that is the subject of another post.