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Monday, May 21, 2012

Why the economy sucks

I think almost everybody understands the U.S. government has a severe debt problem.  However, I think many people do not realize the magnitude of our total debt problem.  There are plenty of articles on the internet talking about this problem, but I have yet to see anything in the major media outlets.  I know Bernanke understands this very well and it is part of why he has committed to keep rates near 0 into 2014.  I would be willing to bet he will extend that to 2015 when we get into 2013.  Lets look at a long term chart of the total (not just government) U.S. debt to GDP ratio.


The majority of the time on this chart the ratio was below 160%.  In the 20s there was a bit of a borrowing binge as the ratio moved above 160% and stayed there.  Between 1930 and 1933 the ratio spiked up to 299% because GDP fell by 25%. This was not really a borrowing binge.  It was not until 1949-50 as the ratio came back down under 160% that the economy started to get on a more even upward trajectory.  The current spike up on this chart was caused by a massive pile up of debt, not a big drop in GDP.  This borrowing and spending binge pumped up the economy and the stock market.  This is really what caused the greatest secular bull market in history.   Notice the exponential move up started in the mid 80s when Greenspan took over the FED.  The nickname easy Al was well deserved.  He had a lot to do with getting us into the mess we are in.  There have been many debt bubbles in various parts of the world throughout time.  They always end badly.  The old saying "the bigger the boom, the bigger the bust" has real meaning.   Borrowing and spending has the affect of pulling in future demand (the boom). Once the borrowing binge stops, the demand drops dramatically (the bust).  That chart stopped in 2009, now lets see what has happened since then.

The big spike has started to roll over.  It is likely the great recession has caused people to be more cautious
and cut back on borrowing.  What we have seen the last few years is bursts of spending followed by periods where people cut back and save.  This is very similar to what Japan has been experiencing for the last 20 years.  Every time the economy went through a spending binge, people were proclaiming it was a self sustaining recovery.  Each time it fizzled.  The U.S. economy just went through a spending binge over the winter and just like Japan, the pundits are all out proclaiming the worst is over and the economy will keep improving.  The current economic data is clearly going soft again and is likely to continue.  The pundits will be disappointed yet again. 

Here is the data for the entire world.

The global debt to GDP ratio is over 300%.  This means the entire world has been living well beyond its means.  This is a lot of future demand that has been brought forward.  We will be experiencing a sluggish global economy for quite some time.  It is bound to take a many years to work off the biggest debt bubble in the history of the world.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.