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European Salon de News, Discussion et Klatsch - 22 March | 84 comments (84 topical, editorial, 0 hidden)
Re: Economy and Finance (4.00 / 5)
THE Most Important Chart of the CENTURY, Nathan's Economic Edge  H/T to commentor doublethink on Zero Hedge

The latest U.S. Treasury Z1 Flow of Funds report was released on March 11, 2010, bringing the data current through the end of 2009. What follows is the most important chart of your lifetime. It relegates almost all modern economists and economic theory to the dustbin of history. Any economic theory, formula, or relationship that does not consider this non-linear relationship of DEBT and phase transition is destined to fail.

It explains the "jobless" recoveries of the past and how each recent economic cycle produces higher money figures, yet lower employment. It explains why we are seeing debt driven events that circle the globe. It explains the psychological uneasiness that underpins this point in history, the elephant in the room that nobody sees or can describe.



"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Mar 21st, 2010 at 11:27:56 PM EST
[ Parent ]
Re: Economy and Finance (4.00 / 3)
This plus the paper showing bankers cost more than they produce is deadly.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Sun Mar 21st, 2010 at 11:56:59 PM EST
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The end of Business as Usual n/t (none / 1)


The brainless should not be in banking -- Willem Buiter
by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 04:51:17 AM EST
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Re: The end of Business as Usual n/t (none / 0)
Recognition of the end of Business as Usual will be coming soon to an economy near you.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 22nd, 2010 at 03:53:38 PM EST
[ Parent ]
Re: Economy and Finance (none / 1)
I missed that paper? Who wrote it?
by Metatone (metatone [a|t] gmail (dot) com) on Mon Mar 22nd, 2010 at 07:23:21 AM EST
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Re: Economy and Finance (none / 1)
See Sven's diary: What are they worth? (December 14th, 2009)
A total of six different jobs were analysed to assess their overall value. These are the study's main findings:

The elite banker

"Rather than being wealth creators bankers are being handsomely rewarded for bringing the global financial system to the brink of collapse
Paid between £500,000 and half a million and £80m a year, leading bankers destroy £7 of value for every pound they generate".




The brainless should not be in banking -- Willem Buiter
by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 09:23:10 AM EST
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Re: Economy and Finance (none / 1)
But bankers are not the worst:
Advertising executives

The industry "encourages high spending and indebtedness. It can create insatiable aspirations, fuelling feelings of dissatisfaction, inadequacy and stress. For a salary of between £50,000 and £12m top advertising executives destroy £11 of value for every pound in value they generate".

Tax accountants

"Every pound that a tax accountant saves a client is a pound which otherwise would have gone to HM Revenue. For a salary of between £75,000 and £200,000, tax accountants destroy £47 in value, for every pound they generate".



The brainless should not be in banking -- Willem Buiter
by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 09:24:09 AM EST
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Re: Economy and Finance (4.00 / 2)
To Chris Cook's proposed "nega-watt", we can add the nega-buck, the nega-pound and nega-euro, but at least nega-watts served a socially useful purpose.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 22nd, 2010 at 11:25:02 AM EST
[ Parent ]
Re: Economy and Finance (none / 0)
This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.
Described that way, I am not sure that chart reflects a causal relation (that is, a "marginal productivity of debt").
Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!
That is what I don't think follows from the data as presented.

What has happened recently is that US GDP has contracted while debt has expanded. The interesting thing is that in all previous recessions economic contraction was accompanied by deleveraging, given that the ratio of increments of GDP and debt was always positive.

This time we have increasing leverage while the economy slows down: that is, the system as a whole is refusing to deleverage in a recession. If the economy were reducing its stock of debt, the ration of increments of GDP to debt would be positive.

From a data presentation point of view, I'd PN that the vertical axis should not be labelled in dollars, but without units, since it is "per $1 debt".

The brainless should not be in banking -- Willem Buiter

by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 05:39:02 AM EST
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Re: Economy and Finance (none / 0)
I agree that the "phase transition" is probably not that meaningful (except perhaps as another proof that right now that (as per Krugman's hobby horse) economic relationships right now don't follow the normal rules, because we're up at the edge of deflation and zero-bound of interest rates.

However, doesn' the trend (red line) suggest something about the changing effect of debt on GDP? If not, can we think of a better way to get at a "marginal productivity of debt"? It feels like if we can find a way to calculate/graph it, it could be a powerful tool of analysis...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Mar 22nd, 2010 at 07:22:43 AM EST
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Re: Economy and Finance (none / 0)
However, doesn' the trend (red line) suggest something about the changing effect of debt on GDP? If not, can we think of a better way to get at a "marginal productivity of debt"? It feels like if we can find a way to calculate/graph it, it could be a powerful tool of analysis...
Well, if you wanted to see the effect of a variable on another you'd have to plot them with a lag, right?

However, that particular chart does bear further examination. I'm just not sure there's a causal relation or a productivity to be found in it...

The brainless should not be in banking -- Willem Buiter

by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 08:18:59 AM EST
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Re: Economy and Finance (none / 0)
But the chart does suggest that the Reagan-Bush era was much more damaging to the US economy than was the Clinton era, at least from the point of view of debt. If there be such a thing as a "debt trap" then a metric of our progression towards it should be of use.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 22nd, 2010 at 11:33:08 AM EST
[ Parent ]
Re: Economy and Finance (none / 0)
The chart tells you why the bailouts were such a bad idea: the economy kept accumulating debt as GDP shrank.

Another interesting thing about the chart is that it only goes back to the mid-1960's. It would be interesting to see what it looked like into the 1920's.

The brainless should not be in banking -- Willem Buiter

by Carrie (migeru at eurotrib dot com) on Mon Mar 22nd, 2010 at 11:40:51 AM EST
[ Parent ]
Re: Economy and Finance (none / 0)
It would be interesting to see what it looked like into the 1920's.

I was thinking the same thing. From other charts that Steve Keen has posted I recall that the economy then also experienced both decline in GDP and massive increase in debt, but there were not the stabilizers such as SS, Medicare, Unemployment Insurance, etc., nor did the USA already have debt as a huge proportion of GDP when the Crash of '29 struck. We won't repeat those mistakes. We will make new and worse mistakes this time!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 22nd, 2010 at 02:02:41 PM EST
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European Salon de News, Discussion et Klatsch - 22 March | 84 comments (84 topical, 0 editorial, 0 hidden)
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