The Past as Prologue
Reader Watchtower submits:
As you can see this is the 'Total Credit Market Debt as a % of GDP' chart.
In Oct of 08 you wrote:
"At what point will the system break down and go supernova?"
Here is the chart for review:
From the comments:
"Which was from your post titled:
"Does The United States Have a Debt Chandrasekhar Limit?"
OK, now that we have that established, my question is:
Does the debt to GDP chart have a correlation to your 'Chandrasekhar Limit' question you posed back then?
The second question is:
You see where the spike did the cliff dive around 1934 in the first big run up in the chart?
What caused it back then, and is it 'different' this time around?
I guess what I'm saying is that chart is one scary a## chart if it actually means anything anymore.
Of course the Greece thing has me thinking about our nation and this kind of stuff again.
Any thoughts?
I do welcome questions and Watchtower picks out one of my favorite posts of all time!
I do have some thoughts along these lines and I think it relates very much to what we are seeing today. As I am short on time and lacking control of my arms I will repost the article in question and I hope to have a write up tomorrow night. Enjoy!
Does the United States Have a Debt Chandrasekhar Limit?
The entire financial mess that has engulfed the world is really quite easy to fix. I have seen many economists, bloggers, and others make the same argument over the past week that seems to be universal in its appeal. From Paul Krugman, to Nouriel Roubini and even the clearest heads at Minyanville all seem to have arrived at the same solution. Here it is in one sentence:
Have the US Treasury spend whatever it has to to fix the entire world.
Now some have various wrinkles to this plan, but they all boil down to the same thing. There is a growing consensus as bailout after bailout falls flat and a TARP Plan cannot even begin to cover the problem that wild spending is both desireable and harmless. Krugman himself penned an article today for the Times that says "Do not worry about budget deficits!" Give that man another Nobel Prize! Brilliant!
Now as I am one of the sorry uneducated masses, my question for Roubini, Krugman, et al is simple:
Does the United States Have a Debt Chandrasekhar Limit?
The Chandrasekhar Limit is defined as:
"For main-sequence stars with a mass below approximately 8 solar masses, the mass of this core will remain below the Chandrasekhar limit, and they will eventually lose mass (as planetary nebulae) until only the core, which becomes a white dwarf, remains. Stars with higher mass will develop a degenerate core whose mass will grow until it exceeds the limit. At this point the star will explode in a core-collapse supernova, leaving behind either a neutron star or a black hole.".
What I am asking is whether there is a limit on the amount of debt the US can generate before a total implosion occurs (the end result of a supernova). Is there a limit? It seems Iceland could not print or generate enough debt to save itself. Zimbabwe has the market cornered in the 10 Billion dollar note market as they print away. How come the US can make all the money they want?
I realize I am being a bit sarcastic here, but the question is a serious one. At present the US has around 3 Trillion dollars committed to this "rescue" effort. Is 6 trillion too much? 9 Trillion? 30 Trillion? At what point will the system break down and go supernova? Like the FED thinks they know what interest rates have to be in exact percentage points, do economists know how far we can push the debt envelope? I invite any and all to leave their answer in the comments section, or to vote in the new poll question along these lines.
If the US can just make all the money they need, why not make every US citizen a Billionaire? How about making the illegal immigrants millionaires? Why not? It is semantics to say the US can take on another 3-6 Trillion in deficit that will never be paid back but not 30 Trillion as that would be too much. It is not an intellectually honest argument. We will wait for an answer. It may be a while.
Have a good night.
I'm no astronomer or astrophysicist but if I understand my choices, either the U.S economy slowly dwindles until it's a puny dwarf, or it suddenly & violently explodes exterminating all life as we know it.......
ReplyDeleteHmmmmmmm......
I don't suppose there is a third option? Say one where we frolic with the forest animals and then experience sustainable growth with full employment and our economy is converted entirely to Green energy and we all become Vegans???
No.....I didn't think so......but it never hurts to ask!
Ok....so if it's between hooking -up with a dwarf or exploding, I'm going with the dwarf.....
GYSC
ReplyDeletePlease bear with me, while driving over to meet my wife for dinner tonight this chart popped into my head:
http://tinyurl.com/yeqnc76
This is of course the 'Diminishing Returns from each $1 of New Debt in the US Economy' chart.
I'm guessing this is linked to the 'Total Credit Market Debt as a % of GDP' chart in some round about way?
My new question is:
"When $1.00 of new debt has no incremental positive impact on US GDP growth" is that the 'Chandrasekhar Debt Limit', you know, when we go supernova?
Tom,
ReplyDeleteinteresting take!
Watchtower,
wow, this is like homework! I had actually puched that graph up as well earlier doing some research. I will try my best to make a coherent post.
Hmmm. The Chandrasekhar Limit, eh?
ReplyDeleteWell, I'm no astrophysicist, but as I understand it, a supernova is not really an explosion but an implosion, and a black hole is not really a hole but a mass of superconcentrated matter in which the atomic structure has collapsed.
Whatever, that's neither here nor there. The debt level is unsustainable. Finito. End of story.
I read a couple of articles over the last few days, most over at Mises, some at Clusterstock, and a few other blogs, like Naked Capitalism and Mish. All said that the era of Keynesianism is over.
Deficit spending works in times of economic turmoil, but only if you pay down the debt during the rebound. Governments world wide have not done that. So what we have now is a mess of global proportions. Sovereign defaults will be the rule.
The great flaw in Keynes's theory is that it separates macro from micro economics. This is deluded. At whatever level, all economics comes down to a willing buyer and a willing seller agreeing on a price with full disclosure. The problem over the past few decades is that full disclosure was discarded and sleazy deals with false contracts were bought and sold.
Now it's time to pay the piper. We're all Greeks these days.
Now I've got that Oasis song 'Champagne Supernova' stuck in my head.
ReplyDeleteI have already voted with my (financial) feet.
ReplyDeleteMy vote was to protect what I have at the cost of getting more.
In other words ... it's a vote of NO CONFIDENCE in the status quo.
To quote a former idiot savant .... "this sucker is going down".
"We're all Greeks these days."
ReplyDeleteYep, and I am afraid the Goobermint is getting ready to play "hide the sausage".
I was laying in bed last night wondering what sort of trigger it would take to bring the rest of this house of cards down.
ReplyDeleteI'm always thinking of a dramatic black swan event, a Chuck Norris roundhouse kick to the face type of incident if you will.
But then I remembered in the comment section from the 'Chandrasekhar' post of 08 GYSC was saying that he didn't think it would take something drastic like a black swan to hit the limit.
Then I thought of that old biblical saying "it's the little foxes that spoil the vine", so you could be right about that GYSC, may not need a black swan event to bring this sucker completely down.
Isaac Asimov a had fastening approach to large numbers he called T-Formation, which occupies a chapter in one of his books. A trillion trillion is T2,a trillion trillion trillion T3 etc.
ReplyDeleteA fascinating little read, but I've never been able to find the text online. Here's a mention of it though.
http://en.wikipedia.org/wiki/Adding_a_Dimension
BTW, if T2 won't do the trick for the economy certainly T3 will.
Hey gyc, just emailed Jess with your request and a link to your blog. I was never a big Star Wars fan but I'm sure that's what all the references were about. LOL
ReplyDeleteRight now I go to bed everynight praying to the universe that Josh McD finds it within himself to sign McNabb and Julius Peppers.
Dave i will reply in new post comments section.
ReplyDelete