5 ms·

Capitalism Is Dead, Long Live Debtism

27 points by cinquemb 6y ago

rsj_hn 6y ago
I'm not a fan of this piece, which seems sloppy and superficial. Here is an example: "Every debt product — sovereign, emerging markets, financial and non-financial corporate, housing, consumer, student, and health care — is at or near all-time highs. Total debt measured 150% of US GDP in 1980; today it hovers at 400%. During the worst stages of the Great Depression it was 300%." The first warning sign is that the source is a seekingAlpha blog. But the second big red flag are the words "total debt", which is a meaningless statement. Consider two scenarios: Scenario A: I borrow from a bank to buy a house. I now have an asset (house) and a liability (mortgage debt). The bank that lent me the money now has an asset (my note) and a liability (the deposit it created for me). Whoever I bought the house from with the deposit given to me by the bank now holds the bank deposit as an asset. Scenario B: I borrow from the credit markets by selling a bond (or alternately, I borrow from a bank and the bank sells off my note as a mortgage bond). I have the same asset (house), but a different liability (the bond). Someone else in the credit markets has my bond. Now if the amount borrowed was X, according to the calculations of "total debt", In scenario A, the total debt is 2X, because they are double counting the liability of the bank as well as my liability. In scenario B, the total debt is just X because the bank is no longer involved and it's a credit relationship between two members of the non-financial sector. So whenever you want to count all debt, you need to count all debt of the non-financial sector, or count all debt in the financial sector, but you can't add these together to get some fantastical "total debt", as that is double counting. People who talk about "total debt" do not know this and their opinions about Z.1 data should be treated with great skepticism. Another thing to look at is interest rates. The idea that you would only compare debt and income without taking interest rates into account is the third red flag. As the ability to service debt is not just a function of your total income but also of the rate you are paying. Again, people who have even a basic awareness of what debt is know that you can't just look at debt/income. When someone makes a comparison of debt/income in which there are two very different interest rate regimes, well you shouldn't subscribe to their newsletter either.
- zhengiszen 6y ago
  Thanks tout for the time and effort you put to explain it in detail.
- georgeplusplus 6y ago
  I don’t get your point. You have a qualm with how he referenced debt, but anyway you slice it, The US has a debt problem. After corona, the USA now has a debt to GDP ratio over 100%. If you want to talk about household debt to income the USA is literally taking on more debt than they produce. That’s even with the modest way GDP is calculated which some economists think it’s even worse than reported. So hate the newsletter but the awareness is still important and your dismissive comment stifles conversation.
  - annexrichmond 6y ago
    Debt is not the whole picture. You have to take interest rates into account as well when making comparisons. For example, let’s say interest rates were 0%. Of course you’d expect debt to increase and that’s not necessarily a bad thing. I just bought a house and took advantage of lower interest rates and now in debt — so what?
    - vmception 6y ago
      you have to pay interest and principal every interval failure to have enough resources to pay either is the problem, the problem being default, there not being enough resources to pay it off the market no longer tolerating your currency as exchangeable
      - rsj_hn 6y ago
        > you have to pay interest and principal every interval So this is another red flag. An individual has to repay principle -- e.g. repay a loan. But a sector of the economy does not repay a loan. A sector of the economy, in aggregate just rolls over loans as new home buyers take out new loans while home sellers retire old loans, for households as a whole, it does not make sense to talk of the total debt level as being "repaid". It would be a silly anthropomorphism to ask "When will the household sector finally pay down its mortgage debt?" The only way that would happen is if households stopped buying houses. So let's not apply anthropomorphisms to an analysis of sectoral debt to GDP ratios. If you have statistic that a percentage of actual households have too high debt service costs versus historical data, let's hear that argument instead of Z.1 ratios. When we are talking about sectors of the economy, all that matters is whether the interest costs are too burdensome. An increase in the interest rate might make interest payments more uncomfortable and cause the sector to reduce its debt to a more appropriate level. That is rational, right? Then so is increasing the debt level when rates fall.
mrkramer 6y ago
"Capitalism Is Dead, Long Live Debtism" Isn't debt (loan) the way money gets created? https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

27 points by cinquemb 6y ago

I'm not a fan of this piece, which seems sloppy and superficial. Here is an example: "Every debt product — sovereign, emerging markets, financial and non-financial corporate, housing, consumer, student, and health care — is at or near all-time highs. Total debt measured 150% of US GDP in 1980; today it hovers at 400%. During the worst stages of the Great Depression it was 300%." The first warning sign is that the source is a seekingAlpha blog. But the second big red flag are the words "total debt", which is a meaningless statement. Consider two scenarios: Scenario A: I borrow from a bank to buy a house. I now have an asset (house) and a liability (mortgage debt). The bank that lent me the money now has an asset (my note) and a liability (the deposit it created for me). Whoever I bought the house from with the deposit given to me by the bank now holds the bank deposit as an asset. Scenario B: I borrow from the credit markets by selling a bond (or alternately, I borrow from a bank and the bank sells off my note as a mortgage bond). I have the same asset (house), but a different liability (the bond). Someone else in the credit markets has my bond. Now if the amount borrowed was X, according to the calculations of "total debt", In scenario A, the total debt is 2X, because they are double counting the liability of the bank as well as my liability. In scenario B, the total debt is just X because the bank is no longer involved and it's a credit relationship between two members of the non-financial sector. So whenever you want to count all debt, you need to count all debt of the non-financial sector, or count all debt in the financial sector, but you can't add these together to get some fantastical "total debt", as that is double counting. People who talk about "total debt" do not know this and their opinions about Z.1 data should be treated with great skepticism. Another thing to look at is interest rates. The idea that you would only compare debt and income without taking interest rates into account is the third red flag. As the ability to service debt is not just a function of your total income but also of the rate you are paying. Again, people who have even a basic awareness of what debt is know that you can't just look at debt/income. When someone makes a comparison of debt/income in which there are two very different interest rate regimes, well you shouldn't subscribe to their newsletter either.

zhengiszen 6y ago
Thanks tout for the time and effort you put to explain it in detail.
georgeplusplus 6y ago
I don’t get your point. You have a qualm with how he referenced debt, but anyway you slice it, The US has a debt problem. After corona, the USA now has a debt to GDP ratio over 100%. If you want to talk about household debt to income the USA is literally taking on more debt than they produce. That’s even with the modest way GDP is calculated which some economists think it’s even worse than reported. So hate the newsletter but the awareness is still important and your dismissive comment stifles conversation.
- annexrichmond 6y ago
  Debt is not the whole picture. You have to take interest rates into account as well when making comparisons. For example, let’s say interest rates were 0%. Of course you’d expect debt to increase and that’s not necessarily a bad thing. I just bought a house and took advantage of lower interest rates and now in debt — so what?
  - vmception 6y ago
    you have to pay interest and principal every interval failure to have enough resources to pay either is the problem, the problem being default, there not being enough resources to pay it off the market no longer tolerating your currency as exchangeable
    - rsj_hn 6y ago
      > you have to pay interest and principal every interval So this is another red flag. An individual has to repay principle -- e.g. repay a loan. But a sector of the economy does not repay a loan. A sector of the economy, in aggregate just rolls over loans as new home buyers take out new loans while home sellers retire old loans, for households as a whole, it does not make sense to talk of the total debt level as being "repaid". It would be a silly anthropomorphism to ask "When will the household sector finally pay down its mortgage debt?" The only way that would happen is if households stopped buying houses. So let's not apply anthropomorphisms to an analysis of sectoral debt to GDP ratios. If you have statistic that a percentage of actual households have too high debt service costs versus historical data, let's hear that argument instead of Z.1 ratios. When we are talking about sectors of the economy, all that matters is whether the interest costs are too burdensome. An increase in the interest rate might make interest payments more uncomfortable and cause the sector to reduce its debt to a more appropriate level. That is rational, right? Then so is increasing the debt level when rates fall.

mrkramer 6y ago

"Capitalism Is Dead, Long Live Debtism" Isn't debt (loan) the way money gets created? https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...