Notes From the Fieldby Martin Weil

Posts Tagged ‘National debt’

October 26, 2012

US indebtedness continues to decline

Yes, you read that right. While the media has focused exclusively on government debt, which has been rising, I have been more concerned of the significance of the alarming rise in the 2000s of total debt, both public and private. Now, as shown below, this critical measure of total public and private debt as a percentage of GDP is on a steady decline, for the first time in nearly 50 years.

I will stick out my neck here and say this is unquestionably an indication that the healing process from the excesses of the credit crisis is well underway. Yes, we need to address the long-term problem of our public debt, once we have safely escaped the gravitational pull of the 2008 crisis. The solutions to that are readily available and quite simple, this being more of a political than an economic or financial problem. The true public debt time bomb has always been Medicare and Congress needs to find some common ground on this program when the election silly season is finally over.

Thanks to Felix Salmon for the graph above.

August 10, 2012

We Are Not The Profligates We Thought We Were

The conventional wisdom – and I have certainly subscribed to this thesis – has been that Americans have spent their way into indebtedness over the past thirty years, buying large automobiles and flat screen TVs. In 2008, we were awakened to the reality that we could no longer afford these lifestyles. Then along comes this simple chart from the Bank Credit Analyst which tells a slightly different story.

The red line in the graph shows the standard view of US consumption as a percentage of GDP. Consumption averaged in the low 60% range up until it started to steadily climb in the 1980s to a peak of more than 70% in the last few years. With GDP of $15T (Trillion), that comes out to an increase of $1.5T in spending per year (in 2010 dollars) in personal consumption. A staggering amount.

The second, blue line, tells a very different story. It shows consumption with health care costs subtracted.  What this clearly shows is that personal consumption (again as a percentage of GDP) has actually stayed relatively constant since the 1960s. The undeniable increases in lifestyle we have enjoyed are likely attributable to increases in GDP, or alternately the cost reductions afforded by outsourcing manufacturing to China et al. The entire increase in personal consumption, and where we have spent ourselves into the massive hole we find ourselves in, has been on healthcare, plan and simple. Astonishing.

Of course, any competent budget manager, when faced with out of control costs in one area of their budget would have opted for one or both of two options: reduce spending elsewhere and/or attack the rising costs in the out of control area. We have done little of either and find ourselves with debt loads, current and prospective, that we are straining to manage. But the next time someone says we have been spendthrifts and wastrels, I will think of this graph and the out of control costs of healthcare that are the true threat to our national finances.

Sometimes, one simple display of data can provide a remarkable amount of insight.

July 26, 2012

A “No-Brainer” Economic Platform

Five leading economists, spanning the political spectrum from the libertarian Russ Roberts to the liberal Robert Frank, were polled by the team at Planet Money to come up with an economics platform they could all support. Surprisingly, they were able to agree on a radical overhaul of the US tax system, one of the most dysfunctional parts of Federal government.

Six major policy proposals to “fix” our economy – sounds like a bi-partisan winner to me. Read on and you will instantly understand why none is likely to see the light of day in Washington DC anytime soon.

  1. Eliminate the home mortgage interest deduction
  2. End the deduction that corporations get for paying for employee health insurance
  3. Eliminate the corporate income tax altogether
  4. Eliminate all personal income and payroll taxes
  5. Replace Federal tax income with a progressive national consumption tax and additional taxes on activities that cause environmental damage such as energy use.
  6. Legalize drugs

Before you dismiss these politically unfeasible notions out of hand, read the summary arguments, or give the full 26 minute podcast a listen. One day we will have a thoughtful and respectful public discussion of the serious economic issues facing our country. Judging by the increasingly banal media coverage of politics and the associated pandering to the public by those running for office, that day does not yet appear to be at hand.

June 11, 2012

US Debt Burden – the Good News, and the Bad

The good news:

Little by little, our economy is reducing its debt burden, slowly repairing the damage caused by 10, 20 or 30 years of excess.

The bad:

If you want to know why economic growth has been so tepid, here’s your answer. Four years after the storm hit, the economy is still deleveraging. And it’s very hard for any economy to grow when everyone is focused on increasing their savings.

This from Marketwatch

Twenty-plus years of excessive debt accumulation (the data largely point to private, as opposed to public, debt as the sector that was out of control) cannot be unwound overnight without plunging the US into a 1930s style depression.  The balancing act by Central Banks and governments is navigating this deleveraging process without unleashing a depression or its antithesis, runaway inflation.


January 12, 2012

A more thoughtful analysis on Reinhart and Rogoff

Bob Huebscher has been writing terrific analytical pieces at Advisor Perspectives now for a few years.  This one on the cited-everywhere Reinhart and Rogoff This Time is Different book may be his most important. (Note – neither the book nor Huebscher’s piece is necessarily for the casual reader)

In it, Huebscher roundly takes to task the media and an ocean of pundits (from Bill Gross to John Mauldin) who have jumped on the notion that a 90% debt/GDP ratio is somehow a death knell for an economy.

R&R did find that a 90% debt to GDP level would likely reduce growth. But pundits have turned this finding into a warning that the US is poised to turn into Greece, fueling the fire of those demanding draconian and immediate deficit reduction. As Huebscher explains, and R&R confirm, this is not at all what they wrote and those making this claim are simply wrong. To be sure, Huebshcer is not endorsing a “What Me Worry” approach to a significant long-term structural debt problem. But only a true understanding of the data can lead to solutions that will address our debt problem and not just create a crisis of another variety.

How I long for the day (there was one, wasn’t there) when our elected leaders and respected media figures could hold a rational public debate on the economic, for that matter any public policy, issues.  (For one example of what I mean, see Alan Simpson on Fareed Zekaria, who finds some sensible common ground on deficit reduction). Alas what we are offered instead is a steady barrage of media porn.

December 15, 2011

Iraq War, 2003-2011

Iraq war… has cost more than $800 billion so far. But ongoing medical treatment, replacement vehicles, etc., will push costs to $4 trillion or more.

When President George W. Bush launched the war, charging incorrectly that Iraq had weapons of mass destruction, the Pentagon estimated its cost at $50 billion to $60 billion. Economic adviser Lawrence Lindsey got in hot water at the White House when he guessed in public the war could cost as much as $200 billion.

The Christian Science Monitor, marking the official end of the US military’s engagement in Iraq.

Personally I continue to believe, as I did when this war was first publicly proposed in 2002, that it is the worst foreign policy decision in our lifetimes.  Now it also turns out, by greatly helping to turn what in 2000 was a potential US budget surplus into the largest sovereign debt in recorded history, it was one of the worst economic decisions in US history as well.


November 16, 2011

Dylan Ratigan channels his inner Howard Beale

Over the top?  You betcha.

To the point? Just like Howard Beale was.

Are you mad as hell yet?

November 4, 2011

Could America Turn Out Worse than Japan?

That is the title of this sobering piece by PIMCO’s Mohamed El-Erian on Reuters.

There was a time when America looked down on Japan for the latter’s inability to deal with its economic problems. No more. Like Japan, America is now realizing how difficult a post bubble economy can be. The fear is that it will also find out that that it lacks some of Japan’s attributes needed to cope with long years of economic stagnation.

November 2, 2011

The always on-target Martin Wolf

“Creditors can huff…” is Wolf’s latest Op Ed in the FT (registration required) on the hypocrisy of lenders (Germany and China) decrying the borrowing practices of debtors (Greece, Italy, the US).

Do creditors rule the world? Not really. In the short run, they can threaten to turn off the credit. But their surpluses depend on the willingness and ability of others to run deficits. It would be more sensible to admit that there has been too much borrowing by the profligate because there was too much lending by the supposedly prudent.

August 10, 2011

Seven Lean Years

Jeremy Grantham is at the top of my list of market analysts.  His latest, Danger: Children at Play, provides an honest (no candy coating here) overview of where we are and why it is going to be many years before our economic reality returns to anything resembling “normal.”

As I have told clients since the financial crisis, the resolution to our debt crisis will require some form of sacrifice.  Better for the country that this be shared.  What continues to amaze me is the reluctance of any national leader to invoke this need for shared sacrifice, instead as Grantham notes, preferring to proffer more palatable visions of our road back.

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