Monday, August 10, 2009

What's a couple of trillion among friends...

A chart made the rounds today that is really eye opening...









While it's a little hard to read here are the trends -

* the blue line is the total debt of the US (governments, household debt and corporate debt)

* The red line is US GDP (the sum of all economic output).

* The green line is the ratio of debt to GDP.

Note that our ratio of debt to GDP spiked once in the mid-80s as the 1982 recession took a toll and military spending soared. However, we held that ratio of about 2-2.5 times debt to GDP until 2001 when things went haywire and we're closing in on 4x debt to GDP.

Some people argue that in order to restore our economy to a sound economic footing we need to pull our debt to GDP number back to a historical norm (2-2.5x). Since we're talking about cutting our debt levels as a country by $15 to $30 TRILLION this won't happen overnight. In fact, Commstock Partners called today for two decades of substandard performance for the US economy (and markets) as we reduce our leverage as a society. I don't know about you but I'm not sure I can wait out this economy for another 20 years. Ni hao, wo jiao Brian.....

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On a related topic, the National Bureau of Economic Research said today that they may wait until they see significant improvements in the economy before calling the recession over. One NBER member said that the recession may last an additional 18 months and the recent upturn could be “in fact part of a larger decline."

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