Why We Can Not Purchase Our Way Out Of Debt
The Automatic
Earth
Excerpts:
In that context, Mish wrote a piece over the weekend on
the interest America pays on its debt:
Really think the Fed is going to hike? They know they can’t, and the Fed is disingenuous as to why.
A year ago the Fed was discussing 6.5% as a trigger point. In December, the Wall Street Journal noted the “Fed’s Shifting Unemployment Guideposts”. Now, in the wake of a massive collapse in the labor force in which unemployment rate just dropped to 6.7% it’s easy to understand why the goalposts shifted.The Fed pretends its interest rate policy is about a dual mandate of jobs and GDP growth. The above charts show the real reason for the shift: the Fed is in a box of its own making and it has no freaking idea how to get out of the box.
I would think 10% is a very low bad debt percentage
for China and its economy effectively controlled by a shadow banking system to a
rapidly increasing extent. That’s like saying only 10% of US bank assets were
bad in 2007. But the gist of this is obvious: China is a huge credit bomb,
rivaling the US in that aspect too.
What’s more, there is a side to credit that is not
often mentioned, but is absolutely essential. Credit can be a good thing,
provided it is used for constructive purposes (and I don’t mean the construction
of ghost cities). In the US, the days when that applied are long gone, and
credit is a burden only (except for building illusions), because it’s heaped
upon this incredible pile of already existing debt. China, though only for a
fleeting moment, has it somewhat better in this regard.
The data leave little room for doubt. I think
everyone can understand the principle behind this graph:
By 2015, an increase in debt in the US will no
longer produce any growth at all. Then it’s all just pushing on a string. Or
game over, or whatever you want to call it, pick a flavor of your taste. And
then? What then? VK had a nice comment on that as well, especially when combined
with Durden’s graph above:
Credit growth in China was 5.9x faster than GDP growth in Q1 2013. 17 cents GDP gain for every dollar borrowed! They’re approaching the US and Europe.
Dollar for dollar, or cent for cent rather, China
is where the US was just 10 years ago … As I said, that last graph is pretty
familiar, and while it’s not cast in stone, you can bet it serves as a flashing
beacon for many people. But most are going to sail the boat anyway, thinking
they’ll be smart enough to jump off before it hits the Victoria Falls. They
can’t help themselves. The smarter ones have been saying their goodbyes for a
while now.
There are a few major, and inevitable, events we’re
approaching: US (and EU, and Japan) debt payments that become larger than total
income tax revenues, and marginal productivity of debt sinking below zero for
real. If you think the most important signals coming out of the economy are
stock market records and rising home prices, I would urge you to think again. As
for China, all we can do is wait. And perhaps pray, if that’s your thing. Take
your pick of inflection points there, how could you go wrong?
But remember, always, when you read anything at all
about the economy, ask yourself: “what about the debt”? If something, anything,
that happens or is decided, certainly in the west, means more debt is piled on,
beware.
READ COMPLETE ARTICLE
HERE:
No comments:
Post a Comment