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Forum Post: "Nobody understands Debt (But Paul Krugman)" /// Every Other Time Paul Krugman Opens His Malfeasance He Discredits His Debt Hole /// Illusion Of Recovery - Feelings Versus Facts

Posted 6 years ago on Feb. 7, 2012, 8:34 a.m. EST by MonetizingDiscontent (1257)
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"Nobody understands Debt (But Me)"



Luckily they are easy to spot: the demagogues, the manipulators and the hired claqueurs. Unfortunately, there is no lack of media willing to provide a platform to perform their insidious game.

Take Nobel-prize wielding economist Paul Krugman. In an article for the New York Times (“Nobody understands debt”) from January 1, 2012... http://www.nytimes.com/2012/01/02/opinion/krugman-nobody-understands-debt.html?_r=1 ...he writes:

“Through most of 2011, as in 2012, almost all of the conversation in Washington was about the allegedly urgent issue of reducing the budget deficit.”

His opening gambit: a reduction of the budget deficit is not an urgent issue. Really? The US has reached 100% debt-to-GDP, and each year another 10%-points get added to the pile. Those $15 trillion exclude a vast array of debt from quasi-governmental organizations (FannieMae, FreddieMac, etc) and unfunded liabilities (Medicare, Social Security, Veterans’ benefits) resulting in a total debt of $61.6 trillion, as per the Heritage Foundation. This explains Krugman’s disdain for the institution, as we will see below. He continues:

“This misplaced focus said a lot about our political culture, in particular about how disconnected Congress is from the suffering of ordinary Americans.”

Krugman tries to portray those who are trying to save the country by reducing spending as heartless and mean-spirited people, when those attributes should apply to those who applauded spending future generations’ taxes to the point of collapsing the financial system. To add insult to injury:

“When people in [Washington] D.C. talk about deficits and debt, by and large they have no idea what they’re talking about.”

He brings out the “I know better – I have a Nobel prize” argument. And the reasoning:

“Perhaps most obviously, the economic ‘experts’ on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now! And while they’ve been waiting, those rates have dropped to historical lows.”

This is right in line with those people who, back at the height of the housing boom, ridiculed anyone warning about dangers of a possible fall in housing prices. Only because riding your bike with your hands up in the air went smoothly for 10 seconds doesn’t mean you will make it in one piece over the pothole. Krugman’s rhetoric matches that of a mayfly rejecting the possibility she might die at the end of the day because so far the sun has never set during its life.



Could the international financial crisis have led to a flight to safety into US Treasury bonds? Could the trillions of Fed buying have helped? Could the largest non-official buyer of Treasuries (Cayman Islands) be hedge funds looking for a cheap way to “hedge” stock market risk, because, in a twisted way, they rely on negative correlation between stocks and bonds (if one goes up, the other one goes down) to continue ad infinitum? Where else are the Chinese going to put their trillions of foreign exchange assets accumulated by holding the Yuan down? In the crumbling Euro? Back to mayfly Krugman:

“For while debt can be a problem, the way our politicians and pundits think about debt is all wrong, and exaggerates the problem’s size.”

If anything, the size of the debt problem is underestimated. It is amazing to see how the problem (too much spending leading to too much debt) is being turned around 180 degrees into “the problem is too little spending”.

“Deficit-worriers portray a future in which we’re impoverished by the need to pay back money we’ve been borrowing.”

Paying back debt doesn’t impoverish; spending money you don’t have does. But Mayfly doesn’t relent and tries to spell it out in simple terms for the average American:

“They see America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments. This is, however, a really bad analogy in at least two ways. First, families have to pay back their debt. Governments don’t – all they need to do is ensure that debt grows more slowly than their tax base.”

Exactly. Let’s look at how US GDP and debt have developed over the last 46 years:

(((US GDP LongScale))):


Debt caught up with GDP, reaching 100% in Q4 2011. Debt (taking only the “on-the-books” part) is growing faster than GDP.

Over the last three years, US debt has grown by roughly $4 trillion, while GDP has grown only by $1 trillion. One additional dollar of debt has led only to 25 cents additional GDP. This is the “marginal utility of debt” (how much you get out of an additional dollar of government spending). At elevated debt levels, debt service (interest and redemptions) carves out an increasingly high share of tax revenue, leaving less for productive uses.

(((US Marginal GDP, Debt and Debt Utility))):


The lower chart shows rolling 3-year periods for growth in GDP and debt as well as the resulting ratio (marginal debt utility). It has almost reached zero. Granted, the increase in government debt has partially been “diluted” by a deleveraging of the private sector. Still, 2012 will be the fourth year in a row with a budget deficit exceeding $1 trillion. Continuing this pace, combined with a marginal debt utility of 0.25 would get the US to a Greece-like 143% debt-to-GDP ratio within 9 years. But Mayfly tells us we don’t understand.

“We need more, not less, government spending to get us out of our unemployment trap. And the wrong-headed, ill-informed obsession with debt is standing in its way.”

How can a Nobel-prize carrying economist, who is presumably smart, write such nonsense? “He knows better”, says Jim Rickards (author of “Currency Wars”). And that makes Krugman so dangerous. Decision makers will reference his “debt does not matter” mantra over and over again – until it’s over. Thank you, Mayfly. You really understand debt – and how to make others believe it doesn’t matter.

From Lighthouse Investment Management:

“Nobody understands debt (but me)”


-February 2, 2012-

Illusion Of Recovery - Feelings Versus Facts



“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency involved.”



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[-] 1 points by MonetizingDiscontent (1257) 6 years ago

8 charts from a brave new banking and economic system – Federal Reserve refutes bailouts yet fails to address inflated questionable assets on their balance sheet. Do you think a $7 billion insurance fund can support the $9.7 trillion in deposits at U.S. banks?


Federal Reserve continues shadow bailout of banking industry – $947 billion of overpaid and low demand mortgage backed securities sit on the massive $2.8 trillion Fed balance sheet. The price of this hidden bailout will hit all Americans.


The tragedy of the too big to fail banking sector – over $1 trillion in deposits are over the $250,000 FDIC limit. $6.5 trillion in insured deposits backed by $3.9 billion.


When the clock strikes 12 – the midnight economy of food assistance. Millions of people shop on the first of the month because electronic food assistance cards are credited. The lost wages of a decade and a Fed determined to bailout the world.


Why Notions of Systemic Failure Are On Par with Bigfoot and Unicorns for Most Investors



I wanted to take a moment to address the notion of serious collapse and/or systemic failure and why it's so hard for most investors to conceive.

First off, most people in general tend to be optimists or to generally believe that things will work out fine. So the idea of catastrophe is not something they spend much time thinking about.

Because of this, and other factors I'm about to explore, the notion of systemic failure is virtually impossible to grasp for most investors. Most professional traders are usually under the age of 40 (in fact they're typically in their mid to late 20s). As a result of this, they:

  • 1) Didn't experience the 1987 Crash

  • 2) Have never seen a Crisis that the Fed/ IMF/ etc. couldn't handle

Let's add a secondary element to this. Most institutional traders today operate, for the most part, based on trading models. These models, in general, are quantitative and based on correlations and patterns, not qualitative judgments.

This goes a long ways towards explaining why the market has developed such simplistic trading patterns. Consider the "Monday market rally" phenomenon we saw throughout 2009-2010. Or how about the Aussie Dollar/Japanese yen correlation to the S&P 500 we saw throughout much of 2010-2011. As one asset manager put it to me recently, the market has essentially become "one big trade" with virtually all asset classes moving tick for tick relative to each other.

Let us consider the mentality these age demographics and professional working tools engender. In general, both of these factors make for short-term thinking and a lack of qualitative analysis. They also mean that items or developments that exist outside the universe of trading models (most of which are entirely based on post-WWII data), are outside the scope of these traders' thinking.

This issue doesn't merely pertain to traders either. Going back 80+ years, there's never been a time in which the markets didn't have a backstop in the form of the Fed/ IMF/ or some other entity. No matter the Crisis that erupted, there was always money printing and other monetary policies to calm the storm.

Now, let's expand our analysis outside of professional traders to include asset managers and other institutional investors, the vast majority of whom are under the age of 60 or so.

Based on this age demographic, we find that there is an entire generation of investment professionals (aged 35-60) who:

  • Have never witnessed nor invested during a bear market in bonds

  • Have never witnessed, nor invested during a credit market collapse

  • Have never witnessed a secular shift in the global economy

Consequently, the vast majority of professional investors are unable to contemplate truly dark times for the markets. After all, the two worst items most of them have witnessed (the Tech Bust and 2008) were both remedied within about 18 months and were followed by massive market rallies.

Because of this, the idea that the financial system might fail or that we might see any number of major catastrophes (Germany leaving the EU, a US debt default, hyperinflation, etc.) is on par with Bigfoot or Unicorns for 99% of those whose jobs are to manage investors' money or advise investors on how to allocate their capital.

If this doesn't worry you, you need to start looking at the actual numbers behind the financial system today. Here are just a few worth considering:

  • 1) US commercial banks currently sit atop $248 TRILLION in derivatives

  • 2) The US Federal Reserve is now buying 91% of all long-term new US debt issuance (at the same time China and Russia are dumping US bonds)

  • 3) Japan already spends roughly half of its annual tax revenues on debt payments and has relied on debt issuance more than tax revenues to fund its budget for four years now (how much longer can this last?)

  • 4) Europe's entire banking system is leveraged at 26 to 1 (Lehman Brothers was leveraged at 30 to 1 when it failed)

Folks, bad times are coming. It doesn't matter what the trading programs or "professionals" think about it... the math simply doesn't add up to us having a calm, profitable time in the markets over the next few years.

For more market and geopolitical insights, swing by www.gainspainscapital.com.

(((Continue Reading this article Here))) http://www.zerohedge.com/contributed/why-notions-systemic-failure-are-par-bigfoot-and-unicorns-most-investors