Tuesday, July 14, 2015

Shame on me

Shame on me. The other day I wrote:

When the reliance on credit is relatively low (as in the U.S. after World War Two, or in the BRICS today) credit costs are also low. So it doesn't take much "extra" credit to offset those costs. But when the reliance on credit is relatively high (as in the U.S. since the 1970s) credit costs are also high. So then it takes a lot of credit use just to offset accumulated credit costs.

I said that, but there's not a graph to be seen in that post from the 12th. I want to fix that.

When I said credit use was low early and high lately in the U.S., I had in mind my debt-per-dollar graph:

Graph #1: Dollars of Total (Public and Private) Debt, for Each Dollar of Spending-Money

But you could as easily see the same thing in a long-term picture of debt relative to GDP:

Graph #2:Dollars of Total (Public and Private) Debt, for Each Dollar of GDP

That's not the shameful part. The shameful part is that I said stuff about the BRICS and I don't really know. I have an inkling, but I don't know.

This is the inkling: The BRICS are the BRICS because they are successful "developing" nations. Maybe the word "developing" no longer even applies to them, I don't know. But they've been doing well, or we wouldn't call them the BRICS and we certainly wouldn't be paying attention to them as we are.

And if they've been doing well, I expect they've been accumulating a lot of debt. Because that's the way we get growth. It's the thing economists know about, using credit to get growth. For some reason they always think about that part -- the "use credit for growth" part -- and they never think about the consequences of sticking to that policy. Economists never think about the "what happens when debt accumulates to an excessive level" part. That's how the economy gets into trouble.

But the BRICS, they're not in trouble yet. So that tells me they don't really have a lot of debt, not yet. I know their debt must have been increasing, because they've been doing well -- and I figure they use the same "use credit for growth" rule as everybody else, to do well. So their debt must be high, relative to what it was say 20 years ago. But it evidently hasn't reached its limit yet, for they are still doing well. So their debt cannot be as high as ours. Theirs is maybe like ours was in the 1990s, the Clinton years, the Goldilocks years. This is my inkling.

Oh, by the way, Graph #2 is from an old post titled Debt-To-GDP Chart "Wrong," US Debt Levels Fine at Business Insider.

"Debt levels are fine". That's what I'm talking about. Debt levels are *not* fine. Is it any wonder we cannot solve the economic problem? We refuse even to look at the problem! Not "we". "They". They refuse to look at the problem. Me? I'm there. Try looking into that place where you dare not look, you'll find me there staring back at you.

By "the reliance on credit" I mean how much credit we have in use. This is something that can be measured. The amount of credit we have in use is what we call "debt". No no, not the Federal debt: That's only how much credit the Federal government has in use. It ignores the rest of our debt.

It is at about this point that many people say, "Oh, well it's the Federal debt that is the problem. Our debt isn't a problem." And that's so cute. No single raindrop believes it is to blame for the flood. I know. It wouldn't matter, if they were doing what I'm doing here -- if they were stopping to check and see whether they are right or not. But they don't have to stop and check. They already have the answer they want. And that's all that matters, apparently.

Wow, I'm getting off-topic.

So, the BRICS. How much debt do they have?

From Swarajya:

Graph #3: Government Debt of the BRICS

But that's just government debt. Doesn't count private debt, which is a cost to the private sector and thus a hindrance to growth.

What's that? Did you say Private debt also creates income to the private sector -- is that what you said? Well, yeah, it's true. Trouble is, it's financial income. And financial income tends to stay in the financial sector. It's not spent back into the productive sector, so it undermines growth. That's why excessive debt is a problem.

Yeah, I know: Debt is not just a liability. It is also an asset. It is still a problem, even so. I didn't forget. I didn't forget debt is an asset. But just for the sake of comparison, the U.S. Federal debt is up around 100% of GDP. The numbers on Graph #3 range from 13% to 67% for the BRICS, on average probably less than 50% -- half the U.S. number. The BRICS number has room to go up.


At FT, David Mann points out that China's debt-to-GDP number grew in five years from 155% of GDP to "a relatively high 251 per cent of GDP", then stabilized in mid-2014. So:
1. This is not government debt; Graph #3 shows China's government debt is 22.4% of GDP. So I'm saying David Mann's numbers are for "total" debt, comparable to the U.S. number (350%) shown on Graph #2.
2. China's total debt increased dramatically for a five-year period. Since economists and policymakers rely on the "use credit for growth" model, the dramatic increase in debt means there must also have been a period of dramatic growth. You know there was.
3. If the debt limit is somewhere around 350%, and China is down around 250%, China's total debt could grow for another five years at the same rapid rate as the last five years. That's just a comparison of numbers, not a prediction. Still, China's total debt ratio is low, compared to ours. And they are a young and strong economy, and we are not. But they don't need to keep growing at that rate; their economy is already bigger than ours.


So maybe China is today where the U.S. was at the end of the 1990s: optimistic, and with lots of room yet for the expansion of debt. Compared to where China was in  Nixon's day, China today has a lot of debt. But compared to where the U.S. was at peak debt, China isn't even close.


One more item: Russia. At 21st Century Wire, Moody’s Downgrades Russia’s Debt to ‘JUNK’ Status Just as BRICS Bank is Ratified:
Yesterday we reported on the huge news of Russia’s government ratifying the BRICS Development Bank and suggested that the West would seek to respond in some way. That response emerged just hours later.

Moody’s, the same ratings agency that failed to see the 07/08 crisis coming by rating toxic assets as AAA, has put Russia’s debt into the ‘Junk‘ zone. The agency cites an ‘expected’ continuing depression in Russia, suggesting a ‘decline in confidence’ in the country means growth will not be possible.

Moody’s attempt to paint Russian debt as ‘Junk’ is yet another obvious propaganda stunt aimed at continuing the current demonization campaign against the country. Anybody who would trust the ratings of an agency that framed toxic assets as ‘AAA’ rated should have both their character, and intentions, questioned.

This is not the first incident where Moody’s has weaponized, geopolitically speaking, its dubious rating system to advance US foreign policy interests. 21WIRE reported back in June 2013, when Hong Kong authorities would not honor U.S. requests to arrest and hand over the fugitive Edward Snowden, only to discover that Moody’s had downgraded 9 major Hong Kong banks the following day.


Tell ya what: With Russian government debt at a low 13.41% of GDP, it is easy to buy the 21WIRE story.

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