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Macro Economics
Trillions of Troubles

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By EddieLuck
December 23, 2009

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This is beyond ridiculous. If you hold $100K worth of corporate bonds, but have a $100K mortgage, you are responsible for $200K "indebtedness", but you could wipe it out instantly. So these "X% of GDP" figures are completely meaningless except for public debt. Even there, intragovernmental debt and debt held by US residents should be subtracted from the 141% - it's one set of USians owing money to other set of USians. Big deal.

It is a big deal. Once debt/credit starts to fail, as it has already, the process becomes unstoppable in a debt/money economy that has inflated credit to the level ours is floating on now. You get cascading defaults. It doesn't matter who the debt is owed to (In our case it ultimately goes back to the federal reserve bank), because it is the credit destruction caused by defaulting that causes all the bankruptcies and pain.

In your example, when the corporations default on a percentage of your 100k in bonds, your liabilities then exceed your assets and you become insolvent and unable to pay your mortgage as soon as you are unemployed for a few months because you worked for one of the defaulting companies so then you default on your mortgage so then the owner of your mortgage has credit problems too, and on and on. Credit, unlike money, can be totally destroyed overnight. That is the root problem.

Fiat money is bad enough, but when it is mostly issued as credit as in this country, everything works after a fashion as long as credit increases faster than GDP. Then when the credit level reaches saturation point (it has) the banks can't stuff any more of it down our throats because it starts being destroyed faster than it is created. That's where the arithmetic comes in.

Even in the face of all the hysterical efforts of the fed and the govt. to increase credit, the total credit in this country is now falling, just as it did in the early thirties. It will continue to do so until enough has been destroyed that the economy can support it. When the credit has been mostly destroyed, those who have money (not credit) will be able to buy up all the assets on the cheap and start things moving again. We are far from that point.

Last time this happened here, (during the last Great Depression) it took the ratio of total debt /GDP twenty years to fall to the point where expansion took off again around 1949. (It started growing again at that time and continued to do so until this year) In the Japanese credit bust, official policies have obstructed the default process, and after 19 years they are still far from the end of their debt defaults because their total debt/GDP ratio has been kept very high by official policies.
In the case of Zimbabwe, I believe they use money, not credit, so the situation is not nearly as unstable as ours. If they stopped their printing and deficit spending, growth could restart immediately.

The Inconvenient Truth here is that arithmetic rules. This depression will only end after drastic destruction of our credit burden. Fighting it by playing games with "money" just makes it worse and prolongs the agony. You will find that most people who saw this coming are ranting against the official efforts to borrow and print our way out of debt. Those who did not see it coming, and therefore do not understand it, all think that it's great to try to increase credit issuance in an economy that is already drowning in it.

As to your assertion that inter-governmental debt does not count somehow, I don't understand. The largest intergovernmental debt item is at present the money owed by the treasury to the SS trust fund. This money has to be raised from the taxpayer and paid to retirees. It's not as if the money exists somewhere. It has to be drawn by taxation out of the productive economy, and paid to retirees, who will pour it back into the productive economy. All well and good you might say. The problem is that to fund all of the unfunded govt. obligations, 100% of private incomes will have to be drawn out as taxes pretty soon because the obligations are that large. When individuals have to pay 100% of their income in taxes, that is pretty sure to cause a problem. Please check the numbers from the GAO. I'm not exaggerating here.

When one govt. department owes money to another, that does not mean that they can somehow just exchange the money from one account to another. They have virtually no savings in any department, so all govt. debt payments have to be drawn from the economy in taxes. Again, arithmetic makes continuation of our course an impossibility. The govt. will either be defaulting on its obligations in a few years, or reducing its obligations, which is the same thing, or inflating like Zimbabwe, which is also the same thing.

Good luck,

Ed