Debt Productivity
Not much happened yesterday, so I didn’t write an article. No reason to bore you with trivia.
Stocks were having so much fun today as they blasted through 10,900 and are approaching 11,000. Bond interest rates remain on the high end of their range.
The Dollar strengthened, and gold fell. Oil and gasoline rose, and that’s fun and interesting too as gas prices are rising across the US.
In the news today……
US Home prices – declined slightly for the US. However, individual places are having varied results. Los Angeles and San Diego is recovering in its prices (year over year). Phoenix also rose. Las Vegas is still falling.
Apple – is rumored to be coming out with a new iPhone that willwork on the Verizon network. That’s CDMA technology, not GSM – so the phone will only work in the US, but who cares. AT&T has screwed up the relationship with Apple by not having good coverage, and iPhone uses are unhappy in general with AT&T. This could push Apple shares much higher than just the iPad announcement. (I generally don’t talk about individual companies, but I am a MAC user – you’ll have to forgive my enthusiasm.)
Greek Bond Offering – had a reasonable reception yesterday, but today we learn that it was not fully subscribed. This is a disaster for Greece. We’ll see how this plays out, and it is an important story for us to learn from as this could happen to the US Treasury market sometime in the future.
Tonight’s Dinner Conversation……
Debt is the topic for tonight. You’ve probably heard that the US economy is built on a mountain of debt, and debt is fundamental to its inner workings. Well, if this is so, then here is something that should scare the socks right off your feet. It is a graph of the ratio of GDP to Debt. You can think of it this way. If you borrow one dollar, how much does GDP grow? About 50 years ago, this was one to one – or one dollar borrowed created one dollar growth in GDP. But, for some reason, this relationship has diminished. So much so that it now has a negative effect on GDP. Here is the graph:
Our recent crisis drove the graph into negative territory. My conclusion: If this graph is right, we’re doomed. It would mean that our fundamental economy can’t and won’t recover in the form that it was during our lifetimes. Anyone else have a different interpretation?
Here are the last numbers for today:
Dow Jones 30 Industrial – 10.907 (up 12)
10 Year Treasury Bond – 3.87% (no change)
Euro – $1.3415
Gold – $f1103 (down $7)
Oil – $82.42 (up $0.35)
Gasoline – $2.27 (up $0.01)
The one problem I see with your graph is it assumes all borrowed dollars were being put to use in the same way. Borrowing money doesn’t provide growth. How you use your leverage does. The person who borrows money to buy cigarettes isn’t as productive at the person who borrows money to purchase a new piece of equipment and improve producitivity. Perhaps the government was more fiscally responsible 50 years ago? Or at least the economy wasn’t as drug down by the policies of the government.
We are at the end of a multi-generation debt boom cycle so naturally additional debt provides no boost to GDP. The only options are to unwind slowly or quickly. My sense is the USG will continue to monetize the debt through the Fed and this will not have massive inflationary affects because global currencies float and other nations have the same debt problem. Thus, currencies don’t really float, they just sink more or less quickly in relation to each.
Hi David,
I disagree with your comments regarding the relative nature of each currency devaluing together. The way that you and i will measure inflation is how much money we spend for gasoline and groceries. Inflation will hit with the monetization of debt, and it will hit those who “save” more than those who invest in “things”. Inflation is insidious. It will result in something worse than the last Great Depression.
Tom
Hi Bill,
The graph assumes that the “average” debt is spend the same way over time – some people will buy cigarettes and some people will buy productivity tools. Productivity is one of those great things, like compounding interest, that give, give and keep giving over time – and it will help pull America out of our problems over time. America has provided some of the greatest productivity improvements in the history of mankind.
Tom