Comments on: The Humility of Realism, Redux

By: lb

lb — Sat, 22 Nov 2008 14:57:32 +0000

“but if you’re going to have fiat money, at least do it intelligently, so that debt does not get out of control, as it did in the 20s, and 1985-2007.”

nice one.

thought of a crazy idea while i was reading this:

what if the capital structure of banks were reversed, so that debt was subordinate to equity?

think of the difference of how banks would operate, perhaps closer to an austrian ideal?

not realistic of course, but perhaps it brings up some realistic possibilities to consider.

thanks for the read & the thought experiment.

By: Maestro

Maestro — Fri, 21 Nov 2008 01:45:25 +0000

Could you post a link to the source data for the debt/GDP calcs? What types of debt are included? I want to check it out for myself.

By: Quarrel

Quarrel — Wed, 19 Nov 2008 07:15:21 +0000

David,

Interesting post. I pretty much agree with you re debt needing to be reduced for us to then start to muddle through.

You should check out Steve Keen’s site, in particular this post:

http://www.debtdeflation.com/blogs/2008/11/02/debtwatch-no-28-november-2008-what-is-really-going-on/

Where he outlines his core thesis. His thoughts on debt-to-gdp are pretty interesting and compelling. He has an Australian focus, but the macro picture is virtually the same in all of the Anglosphere if not the West generally.

–Q

By: Miguel Barbosa

Miguel Barbosa — Tue, 18 Nov 2008 23:55:49 +0000

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By: Steve

Steve — Tue, 18 Nov 2008 21:11:57 +0000

Dave,

Just for laughs, hope you get a kick out of it:

By: Estragon

Estragon — Tue, 18 Nov 2008 20:49:33 +0000

Debt to GDP is comparing a stock to a flow. The real concern is the sustainability of future foreign debt service out of future production of tradables. (DM)... growing GDP rapidly is impossible in a credit-based economy when the banks are compromised This is simply not true. Germany 1934-39 provides one example. Not to say this is what should or will happen, only that it could and has. Are TARP, TAF, et al are modern day MEFO bills. Let's hope it turns out better this time.

By: D. Cohen

D. Cohen — Tue, 18 Nov 2008 16:56:24 +0000

There was no way US prosperity was not going to take off after
WWII. At that point North America was the only part of the world
with an intact industrial base — everything else had been
destroyed or seriously damaged by fighting. Even other countries
that had not been invaded and were on the winning side — like
Great Britain — had been thorougly bombed during the war.

By: pj

pj — Tue, 18 Nov 2008 12:24:40 +0000

David, I regularly read what you write. Just Awesome.
I think it was a few months back when I ran into a graph which showed the Total Credit in US relative to GDP and how it had really shot up to stratospheric levels and had to come down. Formed the basis of a presentation about how reversion to normal levels is the only way out. It is indeed very difficult but inevitable.
Also, I have been hearing a lot about Austrian Economics lately. Went to mises.org but the books seem too lengthy and difficult to read. Any suggestions on that?
Keep up the good work.

By: baychev

baychev — Tue, 18 Nov 2008 12:10:16 +0000

“Economies that primarily use equity finance are more stable than those that primarily use debt finance.”

i would contrast the US vs the EU. the US companies are financed mostly by equity and the EU ones mostly by debt. the US has much more pronounced boom/bust cycles than the EU.
at the same time i realize that there is much more that contributes to the GDP growth than the means of financing: government spending, ability to accrue national debt through chronic trade deficits, the composition of GDP (inducstry,services, gov’t spending), shady and uncomparable statistics. all those make it very difficult to judge the pure effect of debt vs equity on the contribution to GDP growth, but if i have to make a generalization, i would say exacctly the opposite: economic systems that are distorted by gov’t intervention have smoother GDP dynamics than ones that are more market driven.