18 ms·

Ok, there's something i don't get here. 5.8 trillions in debt, china's total GDP is 12.5 trillions in 2016... That's a lot. And now that reminds me of another

by bsaul 8y ago

Ok, there's something i don't get here. 5.8 trillions in debt, china's total GDP is 12.5 trillions in 2016... That's a lot. And now that reminds me of another number. Apple and Amazon have 1 trillion valuation. I don't understand if my scales are wrong or if something is seriously wrong pretty much everywhere.

btilly 8y ago
Something is seriously wrong pretty much everywhere. We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lot of money on paper. But in reality there are three main places where money can go. 1. The USA, which has been effectively printing money like crazy with low interest rates since 2008. This has been transferring wealth from the real economy to the paper economy. 2. Europe, whose common currency is unsustainable without political integration. There is no general support for political integration, and no reasonable way to untangle the common currency. (Plus Brexit will be a disaster.) 3. China, which has the largest asset bubble in history. When it pops they are likely to wind up in a deflationary spiral, like the one that Japan has been struggling with for decades since its real estate market collapsed in the early 90s. Our last deflationary spiral was during the Great Depression. Of those options, investors see the USA as the least bad.
- bsaul 8y ago
  And add to the confusion the fact that inflation remained quite low. So this money really went straight from central banks to financial assets, without ever reaching the pocket of general consumers. At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?
  - btilly 8y ago
    Everyone is playing kick the can. A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out. What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again. Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets. The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis. Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".
hindsightRegret 8y ago
Please don't compare GDP and market cap. These are different numbers and they don't closely compare. If you want to compare GDP to companies, use something like revenue. Apple revenue in 2016 was 215B, that's 58 times smaller than the GDP of China.
nostrademons 8y ago
You're comparing income-statement numbers (GDP) with balance-sheet numbers (debt, market cap). Money is both a medium of exchange and a store of value. The "medium of exchange" function is traditionally represented in accounting with the income statement - it's a measure of how much money changes hands in a given time period. So a company's GDP measures the total value of all transactions performed within a year. The "store of value" function is traditionally represented by a company's balance sheet, which is a measure of how much value has been accumulated at a particular instant in time. So when local governments in China have $5.8T in debt, that means that some other entity has previously loaned them $5.8T, collectively, and at some point in the future, has a claim on that. Note that this time period might be very long; it's not unusual for debt terms to be 30 years (eg. with T-bills or mortgages). Note also that everybody's debt is somebody else's asset; for example, you could have $5.8T in debt where each local government just deposited their working capital in a bank in the next town over and borrowed from the town to the other side, with no actual outside holders. (This is actually fairly close to the situation with the U.S. national debt, where 50% of the debt is actually owned by other portions of the government - notably the Social Security trust fund and Federal Reserve - and another 10% is owned by state governments.) Here's a classic parable that illustrates the difference: http://scienceblogs.com/evolutionblog/2009/06/15/an-amusing-brainteaser/ http://scienceblogs.com/evolutionblog/2009/06/15/an-amusing-...
- theologic 8y ago
  As an engineering with an accounting degree, it is rare that I get to point out that this is fairly well understood by the bean counters. I'm not saying that you are wrong, but I think that we can simplify it. Once you get a handle on what accountants do (although I think many people just assume they hide stuff!), the parable becomes a non-problem. If you take first year accounting in school, you'll find out that balance sheets are simply a static representation of your asset, liabilities, and retained earnings. Retained earnings is basically the difference in what you owe vs what somebody owes you. In very, very simple language, balance sheets add everything to show your wealth. I think this is a bit simpler than "store of value," but basically says the same thing. Or, as my accounting professor, and probably every accounting professor likes to say, "they are snapshots." Now you can say "but money can be used as a medium of exchange," but I think this really adds complexity. In accounting 101, we simply say income statements show the path by how those quarterly balance sheet snapshots change. If you balance sheet change, it is because some activity happened. Now we don't normally say "medium of exchange" for income statements. Instead, we simply write the steps of making money, which is as follows: Revenue = What you sell -COGS = What it cost you ----- =GM =The results in after the sell -SGA&RDA =What you paid your employees ------ =Net Income = What you made You then add that profit to the balance sheet (less taxes and one time events). Your income statement bottom line perfectly shows up as a change in your retained earnings. So they are perfectly tied together. The "classic" parable that you linked simply misses the point of accounting 101. In the parable, they talk about the "debt" that mysteriously goes away because a stranger comes into town and basically lends a $100. This mystery is not new, and is well understood in accounting, and this is why we have "double entry" bookkeeping. This "paradox" was noticed by various cultures around 800-900 AD. However, the written rules was done by Luca Pacioli, a friar, in 1000 AD. To make it clear what actually happens, Pacioli pointed out that every transaction is both a lending and obligation to payback. Therefore, Pacioli said that all financial transactions have to be recorded twice. So, all of his ledgers recorded transactions on the left side of the T-ledger and on the right side of the T-ledger. Double entry bookkeeping was invented, and a thousand CPAs found lifetime security. Thus all transactions generated a "owed something" and it was recorded on the left side of the ledger, which was something owed or latin debitum, or what we call "debits" today. Each debit entry must be also recorded on the right side with an offsetting entry of the same amount, or what you believed would be paid back or creditum (trust) at the same time. Both sides need to equal zero. Thus if you were a bicycle store, and if you had a $800 bicycle (price you paid) on your balance sheet, and if you sold it for $1000, you would debit your cash by $1000 (add it), you would credit your bike inventory by $800 (remove it), and you would add the $200 profit to your retained earnings. (Well sort of. In your bicycle store, you probably had to pay employees, which would have been taken from the $200 profit, but I'm simplifying.) In the "brain teaser" that you linked, they only do single side entry, which makes it look like everybody is in debt and was down $100. This is not true. Everybody in town both had "owed something" but also an offsetting "trust of being paid back." These two sides equaled zero. Before the $100 was circulated, everybody had a net worth of zero, and afterwards everybody had a net worth of zero. With double entry, everybody in town would have recognized that everybody had an offsetting credit for the debit. Both before and after the exchange their net worth is zero, thus no change. But this is an old thread, and I'll be typing this probably to myself and nobody will ever see it. However, I feel better for explaining it.

by bsaul 8y ago

btilly 8y ago

Something is seriously wrong pretty much everywhere. We are at the end of generations of solving one bubble collapsing by inflating another one. There is a lot of money on paper. But in reality there are three main places where money can go. 1. The USA, which has been effectively printing money like crazy with low interest rates since 2008. This has been transferring wealth from the real economy to the paper economy. 2. Europe, whose common currency is unsustainable without political integration. There is no general support for political integration, and no reasonable way to untangle the common currency. (Plus Brexit will be a disaster.) 3. China, which has the largest asset bubble in history. When it pops they are likely to wind up in a deflationary spiral, like the one that Japan has been struggling with for decades since its real estate market collapsed in the early 90s. Our last deflationary spiral was during the Great Depression. Of those options, investors see the USA as the least bad.

bsaul 8y ago
And add to the confusion the fact that inflation remained quite low. So this money really went straight from central banks to financial assets, without ever reaching the pocket of general consumers. At which point does all this madness stops ? Whenever a new economy emerges that provides more sanity and so drains the inflated assets, i suppose ?
- btilly 8y ago
  Everyone is playing kick the can. A more sane economy is unlikely to outgrow the existing (at least one paper), so that isn't a viable route out. What's left is that some day, one of the financial disasters turns into a real collapse. We're talking a sufficient run on the banks that people stop believing that banks really have money. The last time this happened was 1933, and it was resolved by FDR closing all banks, auditing their books, deciding which to save, and then opening them up again. Given our tighter electronic integration these days, the complications are likely to be greater. Think credit cards being refused, ATMs not working, and general chaos. For values of chaos that include people not knowing if their employers can pay, or how to buy food in supermarkets. The possibility of that happening was the nightmare scenario that was used to convince lawmakers to pass TARP a decade ago. And it is a nightmare with a low but non-zero probability of happening each crisis. Unfortunately every time we face that threat and successfully get rescued the markets become more convinced that big players will be rescued the next time as well. Which encourages more extreme financial brinksmanship and makes the next crisis more likely. That phenomena is called "moral hazard". See also "too big to fail".

hindsightRegret 8y ago

Please don't compare GDP and market cap. These are different numbers and they don't closely compare. If you want to compare GDP to companies, use something like revenue. Apple revenue in 2016 was 215B, that's 58 times smaller than the GDP of China.

nostrademons 8y ago

You're comparing income-statement numbers (GDP) with balance-sheet numbers (debt, market cap). Money is both a medium of exchange and a store of value. The "medium of exchange" function is traditionally represented in accounting with the income statement - it's a measure of how much money changes hands in a given time period. So a company's GDP measures the total value of all transactions performed within a year. The "store of value" function is traditionally represented by a company's balance sheet, which is a measure of how much value has been accumulated at a particular instant in time. So when local governments in China have $5.8T in debt, that means that some other entity has previously loaned them $5.8T, collectively, and at some point in the future, has a claim on that. Note that this time period might be very long; it's not unusual for debt terms to be 30 years (eg. with T-bills or mortgages). Note also that everybody's debt is somebody else's asset; for example, you could have $5.8T in debt where each local government just deposited their working capital in a bank in the next town over and borrowed from the town to the other side, with no actual outside holders. (This is actually fairly close to the situation with the U.S. national debt, where 50% of the debt is actually owned by other portions of the government - notably the Social Security trust fund and Federal Reserve - and another 10% is owned by state governments.) Here's a classic parable that illustrates the difference: http://scienceblogs.com/evolutionblog/2009/06/15/an-amusing-brainteaser/ http://scienceblogs.com/evolutionblog/2009/06/15/an-amusing-...

theologic 8y ago
As an engineering with an accounting degree, it is rare that I get to point out that this is fairly well understood by the bean counters. I'm not saying that you are wrong, but I think that we can simplify it. Once you get a handle on what accountants do (although I think many people just assume they hide stuff!), the parable becomes a non-problem. If you take first year accounting in school, you'll find out that balance sheets are simply a static representation of your asset, liabilities, and retained earnings. Retained earnings is basically the difference in what you owe vs what somebody owes you. In very, very simple language, balance sheets add everything to show your wealth. I think this is a bit simpler than "store of value," but basically says the same thing. Or, as my accounting professor, and probably every accounting professor likes to say, "they are snapshots." Now you can say "but money can be used as a medium of exchange," but I think this really adds complexity. In accounting 101, we simply say income statements show the path by how those quarterly balance sheet snapshots change. If you balance sheet change, it is because some activity happened. Now we don't normally say "medium of exchange" for income statements. Instead, we simply write the steps of making money, which is as follows: Revenue = What you sell -COGS = What it cost you ----- =GM =The results in after the sell -SGA&RDA =What you paid your employees ------ =Net Income = What you made You then add that profit to the balance sheet (less taxes and one time events). Your income statement bottom line perfectly shows up as a change in your retained earnings. So they are perfectly tied together. The "classic" parable that you linked simply misses the point of accounting 101. In the parable, they talk about the "debt" that mysteriously goes away because a stranger comes into town and basically lends a $100. This mystery is not new, and is well understood in accounting, and this is why we have "double entry" bookkeeping. This "paradox" was noticed by various cultures around 800-900 AD. However, the written rules was done by Luca Pacioli, a friar, in 1000 AD. To make it clear what actually happens, Pacioli pointed out that every transaction is both a lending and obligation to payback. Therefore, Pacioli said that all financial transactions have to be recorded twice. So, all of his ledgers recorded transactions on the left side of the T-ledger and on the right side of the T-ledger. Double entry bookkeeping was invented, and a thousand CPAs found lifetime security. Thus all transactions generated a "owed something" and it was recorded on the left side of the ledger, which was something owed or latin debitum, or what we call "debits" today. Each debit entry must be also recorded on the right side with an offsetting entry of the same amount, or what you believed would be paid back or creditum (trust) at the same time. Both sides need to equal zero. Thus if you were a bicycle store, and if you had a $800 bicycle (price you paid) on your balance sheet, and if you sold it for $1000, you would debit your cash by $1000 (add it), you would credit your bike inventory by $800 (remove it), and you would add the $200 profit to your retained earnings. (Well sort of. In your bicycle store, you probably had to pay employees, which would have been taken from the $200 profit, but I'm simplifying.) In the "brain teaser" that you linked, they only do single side entry, which makes it look like everybody is in debt and was down $100. This is not true. Everybody in town both had "owed something" but also an offsetting "trust of being paid back." These two sides equaled zero. Before the $100 was circulated, everybody had a net worth of zero, and afterwards everybody had a net worth of zero. With double entry, everybody in town would have recognized that everybody had an offsetting credit for the debit. Both before and after the exchange their net worth is zero, thus no change. But this is an old thread, and I'll be typing this probably to myself and nobody will ever see it. However, I feel better for explaining it.