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Empirical proof of the limits of monetary expansion and debt creation on the real economy


stopdoingstuff

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Feb 26, 2011
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Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.
 

dancl2000

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Sep 17, 2011
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517


Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.
what would liquidating debts mean :
- people with mortgage difficulty have houses repossesed, evicted, are out on the street ?
- property developers who borrowed massively have their debts wiped, so are free to continue their lives, do so again ?
- banks who have their debt assets wiped our are at severe capital loss, perhaps to point of liquidation

then what would the knock on effects of this be :
- people on the streets try to rent ? massive pressure on rental sector, homelessness surges, people cant work effectively because they have no house in which to keep clean clothes, have showers, tidy away the laptop, whatever
- banks cant lend for new house financing / expansion as either bankrupt or in severe capital crisis
- consumption across the economy goes through the floor, more businesses go bankrupt, more unemployment
- public services and social welfare become unsustainable

Maybe this is a worst case scenario but lets think this through
 

stopdoingstuff

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Feb 26, 2011
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22,897
what would liquidating debts mean :
- people with mortgage difficulty have houses repossesed, evicted, are out on the street ?
- property developers who borrowed massively have their debts wiped, so are free to continue their lives, do so again ?
- banks who have their debt assets wiped our are at severe capital loss, perhaps to point of liquidation

then what would the knock on effects of this be :
- people on the streets try to rent ? massive pressure on rental sector, homelessness surges, people cant work effectively because they have no house in which to keep clean clothes, have showers, tidy away the laptop, whatever
- banks cant lend for new house financing / expansion as either bankrupt or in severe capital crisis
- consumption across the economy goes through the floor, more businesses go bankrupt, more unemployment
- public services and social welfare become unsustainable

Maybe this is a worst case scenario but lets think this through
None of the above- there are plenty of ways to go about. People in Iceland had their debts written down to 110% the value of the equity in their home, loans can be restructured, and unaffordable mortgages on family homes can be transformed into long term rentals with the option to buy with a convenient accounting valuation fiction to avoid the need for recapitalization. The developers need not be spared- they are de facto bankrupt so cut them loose and sell their assets. The banks can be sold off or restructured- banks are not special.

The knockon effects are preciesly what we have been going through for the last 5 years- if we had wound things up earlier we would be out of this by now. AS it stands, the country is full of vacant properties, so rentals would not be a problem. As it stands the banks can't lend now because they are zombie banks. Consumption went through the floor years ago- it is hard to consume if over half of ones earnings goes to interest and taxes. Public spending and welfare are already unsustainable- thats why debt/gdp is approaching 120%, and every new unit of debt produces less marginal GDP growth. In short, we are taking the Japanese route.

But this is bigger than Ireland- the chart relates to the USA. Leaving aside the official debt figures, the net present value of the US government's unfunded liabilities is over 70 trillion dollars, Germany has 5 trillion Euros of hidden debt, and China could already be approaching Western levels of debt before we account for their unfunded liabilities and their Local Government Finance Vehicles. All of this also does not take into account the coming demographic decline.

If we take the above chart and we take the example of Japan, the message is clear- the limits of an economy run on debt and monetary expansion rather than on equity financing, capital formation and productivity gains are becoming impossible to ignore, and the mathematics of the situation cannot be denied. If you create one unit of debt to produce 0.2 units of growth, you get a marginal debt to GDP ratio of 500%. Therefore something has got to give.
 

EUrJokingMeRight

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Sep 28, 2009
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11,840
Yes but inflation is the only thing that will save the Euro and the US economies and that is the aim of the FED and the ECB. Print, print, print until prices start to move and then fuel it by opening credit to the plebs.

And another game of musical chairs/hot potato will begin as planned.

Japan is hoping to benefit from being the first nation to seriously devalue its currency to kickstart a stagnated economy.
It may well work but it has consequences for the rest of the global currencies.
 

dancl2000

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Joined
Sep 17, 2011
Messages
517
None of the above- there are plenty of ways to go about. People in Iceland had their debts written down to 110% the value of the equity in their home, loans can be restructured, and unaffordable mortgages on family homes can be transformed into long term rentals with the option to buy with a convenient accounting valuation fiction to avoid the need for recapitalization. The developers need not be spared- they are de facto bankrupt so cut them loose and sell their assets. The banks can be sold off or restructured- banks are not special.

The knockon effects are preciesly what we have been going through for the last 5 years- if we had wound things up earlier we would be out of this by now. AS it stands, the country is full of vacant properties, so rentals would not be a problem. As it stands the banks can't lend now because they are zombie banks. Consumption went through the floor years ago- it is hard to consume if over half of ones earnings goes to interest and taxes. Public spending and welfare are already unsustainable- thats why debt/gdp is approaching 120%, and every new unit of debt produces less marginal GDP growth. In short, we are taking the Japanese route.

But this is bigger than Ireland- the chart relates to the USA. Leaving aside the official debt figures, the net present value of the US government's unfunded liabilities is over 70 trillion dollars, Germany has 5 trillion Euros of hidden debt, and China could already be approaching Western levels of debt before we account for their unfunded liabilities and their Local Government Finance Vehicles. All of this also does not take into account the coming demographic decline.

If we take the above chart and we take the example of Japan, the message is clear- the limits of an economy run on debt and monetary expansion rather than on equity financing, capital formation and productivity gains are becoming impossible to ignore, and the mathematics of the situation cannot be denied. If you create one unit of debt to produce 0.2 units of growth, you get a marginal debt to GDP ratio of 500%. Therefore something has got to give.
right, for sure there's an argument to be made.. and getting debt down is essential, and it has to be done the right way. what you're saying could be a good way. the iceland example doesnt really hold up though, it's a population of 300,000 people whereas ireland is 4.5m. i'm not sure what meaningful comparison can be held out here.

maybe things wont be simple, what about the working man, wife and kids who borrowed money to speculate on property development ? fair few of them around, do we bankrupt them and take the family home ? or what about the big car loans and credit card debt ?

probably there's two paths to getting things going, one which keeps us in europe which is going to be slow and conservative, more-or-less what's happening at the moment. i'm all for doing everything to improve the situation while keeping the support of europe. unfortunately this means going slowly because it takes time for the ecb and more conservative countries to come around to solutions which are getting results in other parts of the world.

the other option is unilateral action that costs us the support of europe. anyone claiming certainty as to how that would work out is either very very clever or ignorant of the limits of their knowledge. just because things are bad doesnt mean that they'd be better after ill thought through action.

whatever we do, those whose standard of living expectations are still tuned to 2006 will be disappointed and as far as i can tell that's a significant number of people.
 

Big Brother

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Joined
Feb 2, 2011
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2,732


Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.

Beautiful chart.

Says it all.
 

Mad as Fish

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Dec 6, 2012
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But if we hadn't taken on more debt then would we have had any growth at all?
 

james5001

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The graph shows correlation, but I can't see the causation?
 

james5001

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The graph only shows federal government debt. Why would government debt levels be the primary driver of GDP growth?
You don't even have to ask that question yet. The most basic is that the OP was saying that one has a significant influence on the other. He used the graph to illustrate this. The graph, on its own, does not illustrate this.
 

james5001

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seabhcan

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You don't even have to ask that question yet. The most basic is that the OP was saying that one has a significant influence on the other. He used the graph to illustrate this. The graph, on its own, does not illustrate this.
Yep. I could just as easily put a graph of debt and population growth and claim that one causes the other.
 

stopdoingstuff

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Feb 26, 2011
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22,897
But if we hadn't taken on more debt then would we have had any growth at all?
Swden's Debt to GDP ratio is less than 40%, Switzerland's debt to GDP ratio is less than 50%, Australia is in the low 20s..........................so I somehow doubt that. And if all we do with debt is to inflate asset prices and fuel highly speculative transaction, we cannot actually count that as growth at all, especially when we deduct the cost of the fall out. Debt is fine up to a point, especially if it is invested in productive assets whose rate of return is significantly higher than the cost of the debt. But if we only invest it in assets whose returns only exist on paper and whose valuations themselves depend on issuing new debt to further inflate the book value of the assets, then we do not have growth- we have a ponzi scheme. And when this process bids talent- engineers and mathematicians who used to work in indusrty but now work on Wall Street, for example- away from productive activities, we suffer not only from the illusion of growth, but also from the opportunity cost of what the could have produced if they had been working on something that increases the overall productivity (and hence debt servicing capacity) of the real economy.
 

storybud1

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Oct 25, 2011
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Yes but inflation is the only thing that will save the Euro and the US economies and that is the aim of the FED and the ECB. Print, print, print until prices start to move and then fuel it by opening credit to the plebs.

And another game of musical chairs/hot potato will begin as planned.

Japan is hoping to benefit from being the first nation to seriously devalue its currency to kickstart a stagnated economy.
It may well work but it has consequences for the rest of the global currencies.
Don;t forget Japan is trying to force savers to spend by making savings run at a loss and then hopefully savers will spend a little more in the economy.

I think we should reward the savers for spending, example - if you have say 3 year old money and can prove it and you go and spend a portion of your savings in the Irish market - say a new car then you could get a 50% rebate on the huge amount of taxes that are levied on a car. It is more important that we get money to move around then it will trickle down. This is not borrowed money but real money.

Some main streets are turning into Ghost Towns, it is simply madness that we do not look at least look at things differently.
 

stopdoingstuff

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Feb 26, 2011
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Pension funds? Most debt today, one way or another, is owed to pension funds. We work to benefit those who no longer work.
Then it is a sad story for pension funds because they will either not be paid at all or they will be paid in very devalued money.
 
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