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That, which cannot go on forever, won't

by Jerome a Paris Wed Mar 29th, 2006 at 05:24:08 AM EST

Martin Wolf says that complacency about global imbalances is growing (bears have been crying wolf for too long and are discredited), but is deeply misguided.

His argument is summarised by my title, and nicely supplemented by the above graph, which show (despite improper use of different scales) that the problem of US indebtedness has been growing in terms of its actual weight on households - and that even before the recent interest rate increases by the Fed weighed in.

Current "growth" is, quite simply, unsustainable. A lot of things are, it seems. It increasing looks like we are in the last gasps of a massive, and ugly, orgy.


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When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 05:31:46 AM EST
A picture is worth a thousand words </snark>

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 05:35:39 AM EST
[ Parent ]
on fait ce qu'on peut avec ce qu'on a ... :)

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 07:39:51 AM EST
[ Parent ]
posting one picture is also quicker than writing a thousand words.
<You started the snark>

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 07:44:37 AM EST
[ Parent ]
That's how Jerome manages to chalk up so many diaries in a day </snark>

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 07:47:11 AM EST
[ Parent ]
How come I did not think about that myself. Missing a high math background perhaps <snark>
Okay, I'll have to undergo a painful (though much needed) "html for graphs" intensive training session <snark at myself>

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 08:01:23 AM EST
[ Parent ]
by Jerome a Paris (etg@eurotrib.com) on Wed Mar 29th, 2006 at 05:40:44 AM EST
[ Parent ]


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 05:42:43 AM EST
[ Parent ]
Bubble is still growing here in Brisbane at least (if not in Australia)... It actually stopped growing for a year but it's back again...Interest rates still "frozen" here...I don't know...

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Wed Mar 29th, 2006 at 06:04:59 AM EST
[ Parent ]
what is amazing is that, even on the beach, you never lose focus off ET. That is devotion !... Got inspired by the bubbles of snorkeling ?

When through hell, just keep going. W. Churchill
by Agnes a Paris on Wed Mar 29th, 2006 at 07:41:21 AM EST
[ Parent ]
I've been paranoid about the US economy/stock market now for 6-8 years.  Avoided the tech puke out but not making much while waiting.  Still can't pull the trigger to invest in this world market....

The greater fool theory is not running out of fools so far.  Either that or our shared pessimism is totally misplaced.

by HiD on Wed Mar 29th, 2006 at 05:52:05 AM EST
Well, timing is of course the killer.

A good question is what are the safe investments to make now that may prosper when the bubble bursts.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Mar 29th, 2006 at 07:08:57 AM EST
[ Parent ]
I suppose one could say that "forever" is a long time to wait indeed.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 09:19:26 AM EST
[ Parent ]
San Francisco's housing market is cooling down...and causing worries:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2006/03/29/CALECON.TMP

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Wed Mar 29th, 2006 at 05:56:13 AM EST
the most interesting is the debate that followed

US keeps the lead in governmental debt raising

Good to see that my concerns are shared by ET's number 1 ! This is more than flattering.

When through hell, just keep going. W. Churchill

by Agnes a Paris on Wed Mar 29th, 2006 at 07:39:16 AM EST
improper use of different scales

now I see why I could not understand anything !
How do you expect me to fit into the ET graph standards if you keep changing the rules ? :)

When through hell, just keep going. W. Churchill

by Agnes a Paris on Wed Mar 29th, 2006 at 07:43:44 AM EST
Well, I live in L.A. and though I sold my house last year after 4 years and made some money, my profits aren't getting me near re-entering the market.  So I'm waiting for the debt-funded bubble to pop as well.  I'm just afraid the downturn is going to be more than just a "correction."  Ugh.  More importantly, I'm making plans to be in Paris to teach a class next January, and I'm really worried about exchange rates.  The fundamentals of the dollar don't look well either.
by andrethegiant on Wed Mar 29th, 2006 at 07:51:43 AM EST
Imperiophile Niall Ferguson had some interesting things to say about U.S. debt in the NY Times last year (here's a cached copy):

In effect, the Bush administration's combination of tax cuts for the Republican ''base'' and a Global War on Terror is being financed with a multibillion dollar overdraft facility at the People's Bank
of China.

The U.S. current account deficit is now within sight of 6 percent of G.D.P., and net external debt stands at around 30 percent. The precipitous economic history of Latin America shows that an external-debt burden in excess of 20 percent of G.D.P. is potentially dangerous.

It is only when your power wanes -- as the British learned after 1945 -- that owing a fortune in your own currency becomes a real problem. As opposed, that is, to someone else's problem.

... according to a growing number of eminent economists, this arrangement simply cannot last. The dollar pessimists argue that the Asian central banks are already dangerously overexposed both to the dollar and to the U.S. bond market. Sooner or later, they have to get out--at which point the dollar could plunge relative to Asian currencies by as much as a third or two-fifths and U.S. interest rates could leap upward. (When the South Korean central bank recently appeared to indicate that it was shifting out of dollars, there was indeed a brief run on the U.S. currency--until the Koreans hastily issued a denial.)

If the dollar fell by a third against the renminbi, according to Nouriel Roubini, an economist at New York University, the People's Bank of China could suffer a capital loss equivalent to 10 percent of China's gross domestic product. For that reason alone, the P.B.O.C. has every reason to carry on printing renminbi in order to buy dollars.

How long can the Chinese go on financing America's twin deficits?  The answer may be a lot longer than the dollar pessimists expect.  After all, this form of tribute is much less humiliating than those exacted by the last Anglophone empire, which occupied China's best  ports and took over the country's customs system (partly in order to flood the country with Indian opium). There was no obvious upside to that arrangement for the Chinese; the growth rate of per capita G.D.P. was probably negative in that era, compared with 8 or 9 percent a year since 1990.

... there is one key difference between the United States and the countries south of the Rio Grande. Latin American economies have trouble with their foreign debts because those debts are denominated in foreign currency. The United States' external liabilities, by contrast, are almost entirely denominated in its own currency.


Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
by marco on Wed Mar 29th, 2006 at 09:12:06 AM EST
It reminds me of the Cold War. Only instead of Mutuallly Assured Destruction by megatons, the assured destruction is economic.

Considering how much everyone has to lose, maybe the situation really is quasi-stable after all? (At least for another few years.)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Mar 29th, 2006 at 09:40:55 AM EST
[ Parent ]
What is the monetary equivalent of an anti-ballistic missile shield, and is it being deployed as we speak?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 09:48:59 AM EST
[ Parent ]
You can always launch a pre-emptive strike on your own territory.

I'd rate this as a silly Internet rumour, because gold is up all of 1.15% today.

But if it were true - that would certainly be interesting.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Mar 29th, 2006 at 05:21:28 PM EST
[ Parent ]
I am veeery suspicious of the Fed's motives for not reporting the M3 figures. But printing money affects the M1, so they must be doing something else.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 05:40:28 PM EST
[ Parent ]
The real question is, if you believe there is going to be an economic meltdown, how do you protect yourself from it?

During the 1970's crash in the US the stock market tanked, inflation ramped up which made bonds sink as well, and high inflation had rich people moving money into art works and collectables before it lost too much of its worth. Because of the strength of the unions most working people with few assets essentially stayed the same. Wages tended to (almost) keep up with inflation.

This time with all the outstanding debt it would seem that the results will be different. Those with variable rate loans will be in trouble. Since credit card interest rates already reach 24% there is little risk of them increasing, but banks will be squeezed by the cost of borrowing. With no union power it is doubtful that wages will rise with inflation so consumers won't be able to pay down debt with devalued dollars.

I think we will see a fair amount of house defaults which will cause families to double up. Adult children will move back in with their parents (whose houses are paid off), or the elderly will move in with their children because they can't afford the heating bills and other expenses of living separately.

I've been thinking of defensive steps to take for many years now, and I'm still at a loss as to what could work.


Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Mar 29th, 2006 at 10:43:11 AM EST
With no union power it is doubtful that wages will rise with inflation so consumers won't be able to pay down debt with devalued dollars.
With the new [not so much anymore] bankruptcy bill, the debt crisis might result in a whole lot of those people becoming indentured to their creditors.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 10:47:38 AM EST
[ Parent ]
I've guessed before that those who get caught in the impossible bankruptcy system will just disappear into the underground economy.

We will see a rise in black market and criminal activity.


Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Wed Mar 29th, 2006 at 11:08:50 AM EST
[ Parent ]
What a boon for PPP prison projects!

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 11:18:37 AM EST
[ Parent ]
Does this mean I need to practice my waterboarding techniques if I want a job after the crash?
by Metatone (metatone [a|t] gmail (dot) com) on Wed Mar 29th, 2006 at 04:45:34 PM EST
[ Parent ]
Er...


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 04:52:38 PM EST
[ Parent ]
The only defensive step is to be debt-free. If things get really bad and you lose all your assets [assuming you have them], at least you own yourself.

If what you want to protect is not yourself but your assets, you'll have to diversify them as much as possible because there's no way to predict which ones will lose their value.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 29th, 2006 at 11:12:01 AM EST
[ Parent ]
refinancing because of low interest rates.

I'm way beyond the top of this graph (as is any new homeowner) because I've stuck to the old idea that you can afford a house three times your income. Right there, that puts one at 300% debt to income, and when you add car payments, student loans, etc., there you go. I suspect there are a lot of people who had built equity in their house who then decided to refinance and use the proceeds for....what? That's my big question.

Low interest rates like these seem to come along once every 50 years. I'd like to see that graph extended a bit prior to the 1980s. In the 70s/80s, of course, rates were north of 12-15%.

by Upstate NY on Wed Mar 29th, 2006 at 08:11:40 PM EST
True, but real rates are not particularly low nowadays. 12% interest rates with 10% inflation is better for the borrower than 4% rates with 1% inflation.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Mar 30th, 2006 at 02:53:23 AM EST
[ Parent ]
Do you mean inflation, or do you mean nominal income increases? You know the tendency is to blame inflation on salary increases, and for real incomes to grow below inflation. Plus, I am suspicious that inflation calculations are not tweaked to underestimate it.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:34:49 AM EST
[ Parent ]
I wonder whether when people calculate "net worth" (as wchurchill, who must have a nonnegligible amount of same since he's so fond of the concept </snark>) they include the value of the home to offeset the mortgage. A lot of risk involved in that little detail.

I personally don't think a first home should be considered "equity" at all: it's like considering the clothes you're wearing an asset. Sure, it is there for you to self if you're desperate, but we all know there is a stigma ssociated with "gambling away one's shirt/house/estate", and for good reason.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:33:11 AM EST
[ Parent ]
They generally do, according to my knowledgeable source.
by Colman (colman at eurotrib.com) on Thu Mar 30th, 2006 at 03:36:26 AM EST
[ Parent ]
In my book, that's cooking the books. But then again, I'm risk-averse.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:40:19 AM EST
[ Parent ]
The loan you used to buy it has to be considered against it otherwise net worth would make no sense.

The risk adverseness depends on what valuation you use ...

by Colman (colman at eurotrib.com) on Thu Mar 30th, 2006 at 03:43:56 AM EST
[ Parent ]
Well, the point is that a 1% downturn in the housing market and a 1% increase in interest rates can suddenly put you in the red.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:45:17 AM EST
[ Parent ]
Not if you use a conservative valuation that takes that into account.
by Colman (colman at eurotrib.com) on Thu Mar 30th, 2006 at 03:46:05 AM EST
[ Parent ]
But if the market is in a bubble and you use a conservative valuation you can't get a mortgage, now can you?

Well, you can get a 110%-equity, interest-only, variable-rate mortgage, and there are borrowers insane enough to accept those terms and lenders irresponsible enough to offer them.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:47:56 AM EST
[ Parent ]
While I don't have one of those loans, I will argue that they are excellent loans for responsible people.

I know this theory is averse to the banking community, but consider this: who profits off your equity while you're paying the mortgage interest? Why shouldn't people profit off their own equity? While I recognize these loans have been much abused to leverage people into houses they can't afford, I was very close to an I/O loan before finding an incredible fixed-rate. The thing is, my house still only cost 2.5 X my salary. If you're using an I/O to get into a house that's 5 X your salary, then that's abuse. Initially, these I/O loans were intended as consumer-frinedly loans that came out after bank deregulation in the United States, and the banks absoltuely hated them.

by Upstate NY on Thu Mar 30th, 2006 at 09:35:43 PM EST
[ Parent ]
What I mean is that your debt liabilities are actual, whereas your house's value is potential [and this is your primary home we're talking about: the opportunity cost of selling it is not negligible].

I am not saying that you shouldn't use the loan to offset the value of your home, but that the potential value of your primary home should not really be used to offset your mortgage.

Or, rather, if I can barely meet my mortgage payments it's little consolation that my home gives me a positive net worth.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:57:09 AM EST
[ Parent ]
And saying you have positive net worth because your house's market value is higher than your unpaid mortgage, which is several multiples of your yearly income, is what people call "a highly leveraged position". If people criticize hedge funds for putting the market's stability at risk because they are highly leveraged and have large positions (see LTCM), why is the current remortgage-fuelled spending binge a good thing?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:43:17 AM EST
[ Parent ]
As I say above it really depends on what value you use: if you use a bubble market value for the long-run value then you're probably not very smart.
by Colman (colman at eurotrib.com) on Thu Mar 30th, 2006 at 03:45:29 AM EST
[ Parent ]
Bubble? What bubble? This is a healthy market. </snark>

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 03:46:18 AM EST
[ Parent ]
I suspect there are a lot of people who had built equity in their house who then decided to refinance and use the proceeds for....what? That's my big question.
For consumption so the US economy did not shut down after 9/11.

Refinancing makes a lot of sense if you can use it to reduce the term of your mortgage. But many people not only refinanced their outstanding principal but they remortgaged what they had already paid.

There are two ways to boost demand to stem a recession: Keynesianism and gambling your home.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 30th, 2006 at 04:10:16 AM EST
[ Parent ]


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