Our problems today stem from too much debt, both personal and governmental.? When enough of the populace is overindebted, they become conservative in spending.? When corporations see that, they become conservative as well, and cut back on production.? The same is true with governments.? As governments get more indebted, people begin to think they won’t spend as much in the future, which is a reasonable assumption.
But what do the pundits suggest?? Borrow more.? If you only would borrow more, and allocate the money to our favored projects, things would improve.? But that is more of the “hair of the dog that bit you” reasoning.? More debt does not solve the problem of too much debt.
In general, the more of the economy that we hand off to the government, economic growth will be less.? The government rarely grows anything, except itself.
I realize in the short-run that reductions in the growth of debt, much less reductions in debt will be viewed negatively by many.? The question becomes whether you want a solution, or you want to continue the disease, and hope for a miracle.
This problem is not limited to the US.? It extends to the Eurozone and China, and indirectly to the rest of the developed and semi-developed world.? In the Eurozone, the ECB and EFSF buy the debts of the weakest nations in order to back the Euro.? Imagine the Fed buying Puerto Rican and Californian bonds.? Ugly, and I hope the Fed does not become more imaginative.? It is too speculative already.
The Eurozone is transforming what was a fringe problem into a core problem and CDS spreads of Germany and France are greater than those of the UK, which has its own currency.? If the Eurozone were a nation, it would be in roughly the same shape as the US, which means not good.
As for China, the government forces loans that are not economic on the banks.? There are many projects that seem to have no economic purpose, but might have political purpose.? Why build ghost cities?? Why build a highway to Xingjang, and plan a model city there?? For the latter it is to control the Uighurs; for the former, I am not sure, aside from distorting GDP statistics.
China also has its issues with owning US debt.? They have to own US debt to keep their currency cheap for exporting.? This is just another way that China discriminates against their consumers in favor of exporters who are political cronies.
Coming back to the US, the Fed encouraged more debt todayby saying that financing rates would remain low for two years.? That may push up asset prices, and allow the highest quality borrowers to borrow more, but is useless in stimulating the economy, because credit spreads do not respond to the Fed when the economy as a whole is overlevered.
The world is led by debt junkies who think that debt doesn’t matter.? They are leading us to a greater crisis where the only thing that does matter is debt, and for political reasons, some governments will not be willing to pay in full.
You hit the nail on the head, David. I am simply amazed that you are one of very few professional analysts who can see and say that. Perhaps because you are independent. The future gets uglier by the day, and politicians just want to push the day of reckoning out to when they are not in office anymore. It’s not working (see the last few days). It won’t help their legacy either. They either lack brains, or honesty, or balls, or all three.
David,
Another concept which gets very little airplay is the enormous currency mismatch that central banks in China and other surplus nations have taken on.
Meanwhile the Fed is leveraged at say 55 to 1, is holding some hard to value assets, and has a worrisome duration mismatch. The ECB of course is now holding low quality peripheral debt.
It does not seem that this will all end well.
“More debt does not solve the problem of too much debt.”
True most of the time, but there can be marginal utility in shifting debt from balance-sheet constrained private actors to the (currently) non-balance-sheet-constrained government.
(Disclosure: I am a net creditor, and am currently getting individually screwed by the policies espoused herein. But higher, and sooner, long-run economic growth might make up for that.)
“And this means that all debt isn?t created equal ? which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past.”
“Yes, private debt will in part have been replaced by public debt ? but the point is that debt will have been shifted away from severely balance-sheet-constrained players, so that the economy?s problems will have been reduced even if the overall level of debt hasn?t fallen.”
“The bottom line, then, is that the plausible-sounding argument that debt can?t cure debt is just wrong. On the contrary, it can ? and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve.”
Source: http://krugman.blogs.nytimes.com/2011/06/08/reposted-sam-janet-and-debt/