Thinking About Debt Deflation
Amid my recent difficulties (sickness, loss of my main computer, difficulties updating my blog software), I have been musing about the health of our economy going forward. Before I give my opinion, I want to share a range of views that I think are worth reading:
- China Institute Proposes Weaker Yuan to Boost Growth
- The Great Depression – Just the Facts, Ma’am
- Recession? No, It’s a D-process, and It Will Be Long
- The Chart That Changed the World — Wrong?
- More Than Two Aspirin
- Steve Keen’s Debtwatch
- No alternative to inflation
- How Government Created the Financial Crisis
- Hire Irving Fisher!
I admire the efforts that many are making in moving back to first principles. We see analyses from Classical, Austrian, Post-Keynesian, Minsky (nonlinear dynamics), and other perspectives.
My view remains that depressions result from a buildup of too much debt, including debt complexity. With the recent analysis from Credit Suisse, they dissed adding together financial and nonfinancial debts, as there would be double counting. Let me first say that there is no good measure here, but the double counting in a complex debt economy is useful to see. When there is a chain of parties relying on debt repayment, like a set of dominoes, the system is fragile; one little jolt could change things for many.
Aside from that, our economy behaves like an economy in a depression. The banks lend considerably less. Corporations as a whole cut back as aggregate demand drops. People save more. Prices of asset ratchet down to reflect current buying power, which seems to be shrinking every day. The government replaces markets in the process of trying to save them. Protectionist pressures are global, as is the economic weakness.
I don’t find the actions of the Fed or the current stimulus bill to be very relevant to our crisis, because they do little to reduce our indebtedness as a percentage of GDP. In a credit based economy, once the banks and consumers are stuffed full of badly underwritten debt, it is difficult for the system to clear until those debts are reduced/liquidated.
February 12th, 200911:03 am at
DEBT: The GaveKal people in Hong Kong (Anatole Kaletsky’s outfit) make the point that much of the increase in debt was due to the complexity of financial instruments, and did not add to the burden on the “real” economy.
That is, at one time a $100K debt on a house owed by Owner A to Bank B created $100K of debt in the economy. Now, that debt is passed on to C, D, E, creating another $100K in debt at each step. If I understand GK correctly, they think this has two consequences:
(1) Much of the debt can get wiped out as the financial sector nets things out;
(2) A decline in the value of the real asset has a leveraging effect on debt reduction — that is a $100K loss in value can wipe out $500K in debt on the national books.
The bottom line is that the concern over the increase in leverage may be overdone.
Your thoughts?
February 13th, 200910:15 am at
Hey, just hope you’re feeling better!
We ALLL need you.
February 13th, 20091:16 pm at
I would love to see an analysis/response to Marc Chandler’s piece (”Cutting Consumption Is Not the Answer”) over on RealMoney this morning.